As Fed Chair Ben Bernanke leans toward keeping interest rates at historic lows, we get news that producer prices jumped 1.8% in November, far outpacing analyst's expectation. My first reaction to the headline was "Well, we've seen this before. That increase is all in fuel prices." But core prices jumped 1.2% as well. Time to worry about inflation?

I'm not even going to hide the answer behind the jump. It's no.


With unemployment still at 10 percent and the administration projecting no job growth until spring, it's way, way too early to begin tightening monetary policy with demand so wounded by the jobless rate. As one economist told Bloomberg, "If somebody raises their prices, someone else won't. We're squarely in the disinflationary camp. There is way too much spare capacity."

According to Bloomberg, most economists expect the Fed to start raising rates in the the third quarter of 2010, when the jobless rate will be 9.9. In other words, they expect the Fed to sniff out an end to the disinflationary period when the official unemployment rate is practically the same as today. There are obviously more factors to consider in timing a contractionary monetary policy besides the unemployment rate, and producer prices are one. And yet, with unemployment expected to hold over 9.2 percent until 2011, it seems impossible to me that the White House and Federal Reserve have exhausted their job-fighting options. I'm not sure that I'm ready to endorse the Krugman -- or Gagnon -- policy to call for yet another round of asset purchases to keep money loose as the Fed wraps up its $1.43 trillion housing-debt splurge in March. But monetary and fiscal policy makers need to think about the economic and budgetary implications of 9.2 percent of the country living off jobless insurance and depressing demand for goods for the next two years.

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