Feb. 18, 2010 – 8:00 a.m. CT

Producer Inflation Surprised on Upside; Unemployment Claims Disappointed

The Producer Price Index surprised on the upside in January, driven largely by a spurt in energy prices. The core also moved up after posting no gains in the month prior. The bulk of that increase, however, could be attributed to a rise in light truck prices, which is hardly a harbinger of a broader-based rise in inflation. Indeed, weakness in the vehicle market is likely to force producers to add more incentives in the months to come (I just got a flyer from Saturn-they are offering fire-sale prices to get rid of a dead company's inventories).

Separately, unemployment claims jumped to 473,000, underscoring how elusive a rebound in employment remains. Companies are reporting some signs of optimism about the economy, but remain uncertain about the sustainability of recent gains and, as a result, are still reluctant to hire.

The Bottom Line: The recovery remains fragile – a fact of which the Fed is very aware. It does not intend to raise rates anytime soon. Even Tom Hoenig, president of the Federal Reserve Bank of Kansas City – who dissented at the last meeting with regard to language saying that rates will remain low for an "extended period of time" – is not in any hurry to raise rates. He thought the language should be tweaked to say "for some period," showing he is not nearly as hawkish as many have tried to characterize him to be.

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