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It's not just about food and energy, and that makes it all the more worrisome.

Core wholesale prices, which is to say ignoring food and energy prices, are now running at their highest annual pace since the early 1990s, as our chart below shows. Through April 2008, core producer prices rose by 3.0% for the year, the highest since December 1991.

click to enlarge

And yet, on Tuesday, the Labor Department reported that producer prices overall advanced by a relatively mild 0.2% in April, down considerably from March's soaring 1.1% rise. At first glance, that looks encouraging. So, what's the problem?

The short answer is that inflation at the wholesale level is spreading into the broader economy. Indeed, although top-line wholesale prices rose just 0.2% last month, core wholesale prices jumped at twice that pace, or 0.4%.

This should come as no surprise to those who've been following wholesale prices in recent months. Back in February, your editor noted that the trend in core PPI looked threatening, and the threat has only grown since then.

According to MarketWatch.com, Zach Pandi, an economist for Lehman Bros., wrote: In contrast to February, the wider world seems to be taking notice. The trend in core PPI inflation remains uncomfortably high. This release is likely to keep inflation concern relatively high at the Fed.

Meanwhile, Joel Naroff, chief economist at Naroff Economic Advisors, told the Associated Press:

We can see a steady spreading of wholesale price increases into the more general economy.

Still, there's hope that the slowing economy will dampen the inflationary pressures. Naroff and quite a few others are in this camp. Perhaps, although one might wonder when the dampening will begin. The economy has slowed considerably on a number of fronts in recent quarters, and yet the inflationary pressures still look threatening.

No wonder, then, that Fed funds futures are signaling that the central bank is probably done with cutting interest rates. Contracts with expirations in the months ahead are in agreement that the current 2.0% Fed funds will hold in upcoming FOMC meetings, the next one scheduled for June 24/25.

Depending on how the inflation reports in the weeks and months ahead look, there's even rumblings that the Fed may have to start raising rates a bit, as futures contracts expiring in early 2009 suggest.

The great question in all of this is how will Mr. Market price assets without the tailwind of new injections of liquidity waiting in the wings? If Tuesday's action in the stock market was any indication, it may still be too early to take off your seat belts and walk around the cabin.

Source: Wholesale Threats to the Economy