Conventional wisdom from Wall Street is that last month's producer price index represents an easing of inflationary pressures. Wall Street rallied by over 1% on the Dow and S&P 500, and over 2% on the battered NASDAQ index - which is still over 10% off its local peak.

The underlying numbers suggest instead that a mild form of stagflation is taking hold, with strong pricing pressures on intermediate prices, even as retailers cannot pass those costs on to customers. The bond market, both cash and constant maturity did an about face and marched back towards full inversion, adding 10 basis points to the distance that the 1 month stands over the 30 year. That's right, you get more money doing 1 month loans to the government than 30 years...

The devil lies in two details, one is in the employment cost index, which have been moving up by a total of 3% over the last 12 months. This, combined with lack of pricing power indicates that profits going forward are going to suffer. Remember, one man's inflation, is another man's pricing power.

The second sign that inflation is moving through the snake is intermediate goods - which have moved up an eye popping 8.9% over the last year on a non-seasonally adjusted basis. Which, since business don't pay in non-seasonally adjusted dollars, means the money is going to comeout of someone, sooner or later.

The reason this is worrisome is that profits, specifically corporate profits, have been sustaining this economy along with the three Hs - housing, health care and homeland security. Not wages, not corporate profits. In fact, in no recovery in post-war history has so much of the benefit gone to corporate profits. Now either the high intermediate inflation is going to get passed on, which, when combined with wage increases means that productivity is rolling off a cliff - or the businesses that have bought intermediate goods are going to be left holding the bag, which will mean a drastic slow down of hiring and production.

Housing continues to collapse. 28 states and DC suffered declines last month. If producer price inflation is contained, it is because durable goods - that's houses and cars and the appliances that fill those houses - are dropping rapidly.

In one sense this is a mess of our own creation. By failing to take into account housing inflation earlier, and thus moderating interest rates earlier and faster, we can't count the fall in housing inflation now. The most recent figures indicate that housing inflation is now down to 3.9%, which means that it is finally roughly in line with "rent of equivalent shelter". Americans have been suffering through much higher than listed inflation, and are now going to get whacked on the other direction by seeing their equity evaporate. This has been a consistent pattern through the last two expansions as well, by understating housing inflation, the fed has been able to extend the length of an expansion with loose monetary policy. But "TINSTAAFL" - we pay for it with a longer slog out of the recession, as there is more housing excess to work off, and in the case of the 1990's recovery, a huge S&L Bailout to pay for as well.

The gag is that this economic hack seems to have run out, this expansion we got more housing inflation than ever before, and the cycle has been shorter. Consider that dating the expansion from where every one but the beknighted folks over at the NBER - who changed the rules because they didn't like the results - this expansion has been only 3 years and 4 months from the bottoming of hiring and wages in 2003. If it lasts as long as the bond market thinks - that is to say another 9 months which is the general length from top to bottom inversion to recession - then it will clock in at an anemic 4 years and 1 month. Even Ford-Carter managed better than that. A quarter century of this hasn't produced more growth over time, but it has made it so that more of the benefits have gone to the top of society.

So while the stock market is celebrating a possible further pause in interest rates, the numbers indicate that what they are really doing is averaging stagnation and inflation and coming up with a balanced economy. It doesn't work that way. This is because as US corporations come under profit pressure, they are going to have to engage in what we used to call "down sizing", which was the euphemism for laying lots of people off never to return before reëngineering, which was the one before out sourcing, which was the one before off shoring.

So, if you want to swallow this, and you are willing to spring for equities now trading at very high forward P/Es - there are some people looking to get out of US equities who will be very happy to sell.

Update: CPI numbers this morning show CPI-U at 4.1% and even the so called alledged putative "core inflation" is at 2.7%, which is above the "price stability" line of 2%. Business writers hope that the drop of "core" inflation to .2% in a month from .3% in a month will encourage the fed to stop its rate increases. However, this is all attributable to the decline in clothing. Textiles is in depression in the US, with capacity being slashed, if the argument is that gasoline can't go up forever, then the same is true in the other direction, fairly soon thre will be no more textile jobs to ship over seas.

Two quarters of above trendline growth with inflation running well, well, well above price stability in the last 12 months.