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Tuesday morning's update on wholesale prices brought more bad news on the inflation front. Producer prices jumped a seasonally adjusted 1.0% last month, elevating the 12-month pace to an eye-popping 7.7% - the highest since September 1981.

Higher energy prices are partially responsible for PPI's ascent, but this is no longer solely about oil and gas prices, as yesterday's report reminds. Here are a few examples from the Labor Department's press release:

  • The index for finished goods excluding foods and energy accelerated to 0.4 percent in January from 0.2 percent in December.

  • The index for pharmaceutical preparations advanced 1.5 percent after increasing 0.4 percent in the prior month.

  • Prices for light motor trucks and passenger cars turned up after falling in December.

  • The Producer Price Index for Intermediate Materials, Supplies, and Components rose 1.4 percent in January following a 0.2-percent decrease in December. This upturn was broad-based.

  • Clearly, wholesale and consumer prices are now rising at uncomfortable levels. Maybe they'll cool down, maybe not. Meantime, the prevailing wisdom at the Fed has been that the slowing economy will take the wind out of inflation's sails, leaving Bernanke and company with freedom to continue dropping interest rates. That future may be coming, but so far there's little sign that the pricing trend is cooperating.

    It remains to be seen if the Fed will continue to sit on its monetary hands while inflation continues showing signs of life. If the current scenario continues, the central bank risks losing control of the pricing momentum, and twenty years of hard monetary work hang in the balance. Indeed, some hawks already complain that the Fed's already lost control. We're not quite so pessimistic, and so we still believe that Bernanke can nip the pricing troubles in the bud before inflation takes on a life of its own. But the opportunity won't last forever if the prices keep running higher.

    Time's running out. If the inflationary momentum doesn't show a sustainable downturn soon, or at least tread water, the Fed will have to act. It's either that, or risk even higher inflation in the years ahead.

    Source: Time's Running Out as Wholesale Prices Keep Rising