Yes, folks the US Labor Department announced today that the January PPI moved up by the most in any one month since 1981. Prior to that the inflation records were being smashed in the 1970’s: the age of Watergate, platform shoes and disco balls. Of small comfort is that the core PPI, which excludes food and energy prices, rose 0.4%, driven by higher drug and car prices. Year over year, the PPI is up 7.4% — also the fastest pace since 1981.

The bottom line in all of this is that the Fed’s contention that inflation is under control is looking more and more like science fiction than economic fact. It will therefore be interesting to hear what Ben Bernanke has to say tomorrow at the Humphrey Hawkins testimony that he is obliged to deliver to Congress twice-yearly.

Looking ahead, the inflation problem can only get worse. Why? In three words “money supply growth”. Although the Fed has not published M3 numbers for several years it is estimated that the broad monetary aggregate has been growing at a 13-15% pace over the past few years, about consistent with the growth of credit (which has expanded by USD 5 Trillion since the beginning of the decade). Over time past money growth and measured inflation correlate quite closely.

Whither the bond market and the economy when higher inflation expectations become embedded in the observed long term yields? Are we due a return to the inflation plagued, low growth quagmire of the 1970’s. If so, it is worth noting that balance sheets (Government and the Private Sector) are much less able to sustain the effects of rising interest rates than they were back then. Scary Stuff indeed!

Snippets

• The Federal Deposit Insurance Commission said today that profits at the banks and thrifts it insures fell to a 16-year low in the fourth quarter of 2007 as provisions for bad loans spiked and trading profits fell. For the full year 2007, the same factors led to the first year-over-year decline in profits in six years, according to a report from the Federal Deposit Insurance Corp. (FDIC). “The rising trend in noncurrent loans indicates that write-offs and loss provisions will likely remain high for the near future,” FDIC Chairman Sheila C. Bair said.
• After announcing a record $537 billion of deals in the first six months of 2007, the pace of buyouts has crashed. According to Bloomberg private-equity firms announced only $202 billion of deals worldwide in the second half of 2007. This year, these firms have so far announced $25 billion of deals effectively an 80% drop in activity.
• Home prices fell in the fourth quarter in the majority of U.S. metropolitan areas surveyed by the National Association of Realtors, according to a recent report The median sale price of a U.S. home has dropped more than 10% since the peak 15 months ago. Foreclosures are on the rise. In 2007, and wait…. Bloomberg provides an estimate that by the end of this year, 15 million U.S. households will be “upside down,” meaning, their houses will be worth less than the value of their mortgage loans.
• Bank of America reports that the current financial crisis is, “one of the most vicious in financial history.” A research paper from his bank says the related fall-out from the crisis has caused $8.6 trillion in stock market losses worldwide, slashing around 15% from the total world market capitalisation.

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