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Farrell: Is There Inflation Or Not?

Is there inflation or not? I don't know.

I spent the last two weeks from afar and saw conflicting signals.

The Producer Price Index seemed very "rich" jumping 1.4% month over month. Most of the surge was due to a sharp rise in gasoline prices (up 11.5% for the month). Well, we all pay for gasoline, don't we? The core rate - ex food and energy which are exed out because they are so volatile - was still up .3% month on month. But, say the apologists, that was due to an unusual jump in the very volatile light truck component. Seems there is always some excuse/explanation.

The annual rate of headline PPI inflation has moved to 4.6%, and that is due to the rebound in energy prices early last year. The annual rate of core PPI is only 1%. After mulling over the PPI, the next day the Consumer Price Index - CPI - offered some very moderate numbers. The headline rate advanced .2%, which put the annual rate of gain at 2.6%. That is higher than the Fed wants, but not by a lot. The core rate of CPI actually fell -.1% for the month which is the first time since 1982 that has happened. The annual rate for core CPI is a mellow 1.6%.

My read is the inflation that is trying to poke its head up at the producer level can't get passed on to the consumer so margins will be under pressure. You could argue that the system is awash in liquidity (although blocked at several levels) and economic growth is picking up. The Fed tacitly agreed to that with the discount rate hike last week which would not have been done unless they felt the crisis had passed. Yet on the other hand, unemployment is high, capacity utilization is low, and there is no pressure on wages. Sovereign debt is coming under increasing scrutiny. (Imagine, more countries than Greece played the shuffle the currency derivative game and pushed debt out of sight - until it came back into sight.) With the Euro threatened as it is I think the temptation world wide will be to keep rates low. Our Uncle Ben has two days of Humphrey Hawkins testimony this week and I doubt he'll say rates will be "unusually low for an extended period." But undoubtedly he will be asked about "exit" strategies and maybe his answers will shed some light. I am increasingly of the mind that GDP will be more moderate the second half of the year as the inventory rebuild plays itself out in the first half of the year and there is no need to rush an interest rate increase.

The President is ratcheting up the health care debate.

Anthem Blue Cross of California didn't help themselves with an announced 39% increase in premiums this past week. Talk about timing! The Republicans will show up Thursday at the televised summit and immediately be on the defensive. The President is going all out with a plan to regulate the insurance companies and establish a "Health Insurance Rate Authority." It will provide more regulation of rate increases, reforms to guarantee premiums are affordable and tax credits for families with incomes below a certain level. The Health and Human Services Department will have the power to deny "egregious" premium increases, roll them back, or demand rebates.

He would increase funding for state Medicaid programs. Individual mandates and employer responsibility will be included and "Cadillac" tax plans will still be taxed but delayed until 2018. It's all too confusing but should make for interesting TV as the President uses his bully pulpit to sway the voters. He will propose a tax on "unearned income" (God, I hate that term) to help pay for it all. As George Bernard Shaw once wrote, if you propose taxing Peter to pay Paul, Paul will vote for every time! Yet the voters recently have been of a different mind. Stay tuned.

In the "Oh thank God category" - Greece said don't worry, their borrowing needs are covered until mid March. That's days away. What are we worrying about?

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Vincent Farrell, Jr. is chief investment officer at Soleil Securities Group and a regular contributor to CNBC.

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