What are they not telling you? Let's talk about inflation

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Despite all the happy talk from the Fed about its ability to manage the money supply and wring the excess out of the economy at the proper time, avoiding inflation, when and if the economy ever takes off, is going to be a lot tougher than advertised. And we’re beginning to see rumblings that inflation is trying to find it’s footing:

Industrial production up, but so is wholesale inflation

By Martin Crutsinger, AP Economics Writer

WASHINGTON — Inflation at the wholesale level surged in November, reflecting price jumps in energy and other products while industrial production rose a better-than-expected 0.8% for the month, a sign of recovery taking root in some parts of the economy.

The bigger-than-expected increase in wholesale prices is certain to get the attention of Federal Reserve policymakers beginning a two-day meeting on interest rates.

The Fed has been able to keep interest rates at record lows to bolster the shaky recovery, but if inflation pressures begin to mount, the central bank could be forced to start raising rates sooner than expected to cool the economy and keep prices in check.

The gain in wholesale production shows that businesses and consumers are spending more, clearing inventories and spurring factories to produce more goods. Economists expected the Federal Reserve report to show that overall industrial production grew 0.5% last month.

Stronger activity at mines led last month's increase, rising 2.1%. The critical manufacturing sector — the biggest slice of industrial output — reversed a one-month decline and rose 1.1%. Utilities did fall 1.8%.

Meanwhile, the Labor Department says wholesale prices jumped 1.8% in November, more than double the 0.8% gain analysts expected. Core inflation, which excludes energy and food, rose 0.5%, the biggest increase in more than a year.

The past 12 months, wholesale prices rose 2.4%, biggest gain for a 12-month period since October 2008. Wholesale prices had been negative compared with year-ago levels for 11 straight months.

The November increase followed a 0.3% rise in October and was the largest one-month change since August, a gain also driven by energy.

The report on wholesale prices comes as the Fed was set to begin its final meeting of the year. The absence of inflation due to the recession has allowed the central bank to keep a key interest rate at a record-low the past year.

The unexpected jump in wholesale prices was not likely to alter the outcome of the Fed's deliberations, although it might influence future actions. The Fed is expected to announce Wednesday that it will again keep a key interest rate between zero and 0.25%.

While unemployment dropped slightly in November to 10%, from a 26-year high 10.2%, analysts believe it will resume rising in coming months, acting as a further drag on economic growth. High unemployment has kept a lid on prices, as workers afraid of being laid off, have moderated wage demands.

In a recent speech, Fed Chairman Ben Bernanke said the economy continues to confront "formidable headwinds" as it struggles to sustain a recovery.

Wholesale energy prices jumped 6.9% in November, biggest surge since August. Gasoline prices rose 14.2%, while the cost of home heating oil jumped 18.3% last month.

Still, crude oil prices have been falling in recent days, hovering around $70 a barrel. That's down from a 2009 high of $82 in October.

Food prices rose 0.5% at the wholesale level last month, following a 1.6% rise in October.

The 0.5% rise in core inflation, which excludes food and energy, followed a 0.6% drop in October.

A 4.2% increase in the cost of light trucks and sport-utility vehicles led the gain. The cost of cigarettes rose 2.6%.

The producer price index reflects price pressures before they reach the consumer. The government will release its look at consumer prices Wednesday. Economists believe they will show a more moderate gain of 0.4%, with core consumer prices expected to rise 0.1%.

Contributing: Daniel Wagner, AP Business Writer

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That’s the trade-off: raise interest rates to hold off inflation. The tricky part is knowing how much to raise them to do that without killing the recovery. And, with the massive amounts of cash pumped into the system, I’m not sure that’s possible. Which means it is probable, at some point, that the Fed is simply going to have to make a choice – inflation or high recovery killing interest rates. My guess is they’ll choose the latter (while the politicians holler foul and try to spend more money). That’s why many don’t see economic recovery in the cards any time soon despite the “green shoots” so many politicians continue to spot among the economic ruin of the present economy.