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2.7%  Q1 GDP    4.57%  avg. 30-year mortgage     9.5%  Unemployment

Is inflation finally here?

Two things happened today that pricked up the ears of inflation hawks:

A. This morning, the government released the January Producer Price Index, which shows what businesses are paying to buy things. It went up more than people expected. Even if you remove the volatile energy and food prices, it still went up more than expected.

B. The Fed raised the rate it charges banks to take out emergency loans. Though this doesn't affect consumers, it does reflect the Fed's intention to begin withdrawing its massive and long-reaching tentacles into the financial system and it may be a prelude to a tightening of monetary policy.

The PPI is often a good forecaster for the CPI, or Consumer Price Index -- or just plain old inflation -- which comes out tomorrow.

A big mystery over the past year has been: Where is the inflation? The Fed pumped gazillions of new dollars into the economy in 2008 to stave off a liquidity crisis, which it did. But, in theory, it should have also decreased the value of every dollar in circulation, because there were so many more of them. When the value of a dollar drops, it buys less. The impact on you is higher prices. The Fed can stave off inflation by raising interest rates for consumers, which it almost certainly will do this year.

Yet, inflation was nonexistent for all of 2009. Indeed, some months showed negative inflation, or deflation.

The common explanation for the lack of inflation is that there is a lot of "slack" in the system. This means the economy has been weak, so consumer demand is low and prices stay low.

But now the economy is showing signs of recovery, as suggested by the fourth-quarter 2009 GDP, which soared to a 5.7 percent annualized rate. And all that extra money is still out there in the system.

"We have huge inflation in the quantity of money," Miller Tabak equity strategist Peter Boockvar says, "and it will continue to slowly creep into prices."

We will know more tomorrow morning when the consumer inflation data comes out.

I can't help but be reminded of words the late, great Patrick Swayze in "Next of Kin," said to a particularly bad guy: "You ain't seen bad yet. But it's comin'."

Follow me on Twitter at @theticker

By Frank Ahrens  |  February 18, 2010; 5:24 PM ET
Categories:  Data , The Ticker  | Tags: CPI, PPI, Peter Boockvar, inflation  
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