Stocks started out strong, but despite the lower producer inflation via PPI the markets were mixed and the net result was not certain until the very end of the day. Many of the Warren Buffett stocks and George Soros stocks were among the movers today. One issue affecting stocks ahead is that investors and traders alike are starting to figure out that cost cuts at the likes of what was seen over the last year cannot go on forever, and that benefits can only add so much.

Here were today's unofficial closing bell levels:

Dow 10,423.81 +16.85 (0.16%)
S&P 500 1,110.31 +1.01 (0.09%)
Nasdaq 2,203.78 +5.93 (0.27%)

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Markets were mixed and downish Tuesday, but there was some good news to be found.

Housing starts and building permits soared, causing a big pop in shares to battered homebuilders. Whether this is a false start or a real jump, its hard to get anything but good news out of a housing market so beaten down.

On the industrial side, the Produce Price Index remained relatively stable, walking the narrow path between two evils -- deflation and inflation.

New jobless claims jumped unexpectedly last week by 32,000 to 637,000, much worse than economists predicted. And we have another disappointing number: Continuing claims for unemployment rose to a record high of 6.56 million, up from 6.34 million the previous week. The insured unemployment rate rose by .1% to 4.9%.

Obviously, these numbers are throwing cold water on any claims of reaching bottom. Last week, the Labor Department reported that unemployment rose to 8.9%, the highest level in 25 years.

U.S. wholesale prices also rose in April, led by rising food costs. This is a weird fact because it indicates that we are not spiraling into deflation, but it doesn't help the average person. The increase was led by the price of eggs, beef and milk. The price of gas rose by 2.6% but residential fuel costs eased.

On Tuesday, the Federal Reserve's FOMC holds two-day meeting on interest rates and will announce its decision on Wednesday. The Fed's Ben Bernanke will still be out and about this week, discussing the failure of Lehman Brothers later today, and ending up the week speaking at the Independent Community Bankers of America National Convention and Techworld.

Manufacturing will be in focus this week, starting with industrial production numbers for February and the Empire State Manufacturing Survey Diffusion Index for March scheduled to be released Monday morning. Tuesday morning will bring us the Producer Price Index for February, and Thursday morning comes the Philadelphia Fed Outlook Survey -- Diffusion Index Manufacturing for March.

This morning's Producer Price Index (PPI) numbers suggest that the stagflation is in full force. PPI was expected to rise 0.3% for January, and it came in way above at 0.8%. This result, which was much bigger than expected, was due to a 3.7% surge in energy prices with gasoline prices jumping by 15% -- the biggest gain in 14 months. Core PPI -- excluding gasoline and food -- was forecast to creep up 0.1% and it came in at +0.4% in January.

I was expecting PPI to rise but core PPI to drop. Unfortunately, it turns out that many companies were raising prices even as sales slumped. Auto, computer and pharmaceutical makers were among the industries boosting prices in January even as sales fell. Why did they do this? It could be because they needed to make up the revenue that they knew they would lose due to declining unit sales by raising prices on people who had to buy their products.

2008's economy can be divided into two parts. The first is the period between January and July when oil prices ran up to $147 thanks to a speculative trade to short the dollar and buy oil and other commodities. The second part is the post oil's July peak where oil prices have featured a 60% to $55. Today's wholesale price report shows what happens to prices when supply exceeds demand and banks stop lending money to traders trying to profit from anticipated inflation.

Today's wholesale price report is a doozy. The Producer Price Index (PPI) fell 2.8% in October -- much more than the 1.8% decline economists had anticipated. The PPI decline was fueled (pun intended) by a 12.8% decline in energy prices in October. And as long as those energy prices keep falling, inflation will be in full downswing mode. (I am happy to report that I won my bet that gasoline would drop below $1.99 a gallon in Eastern Massachusetts by February -- I went to a station Sunday that charged $1.97.)

But there's more to it than simply declining oil prices. The entire economy was producing goods and services based on an assumption about demand that depended on easy access to debt. By shutting off the debt flow, goods are simply too expensive for consumers and businesses to pay the price. This means businesses will cut back on production and slash prices to clear their shelves of inventory. Then they'll shut down factories and lay off workers. And the lower demand from those poorer former workers will start the cycle anew.

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

U.S. investors and consumers haven't received much good news lately, which is why Friday's producer price index report was a welcome sight.

U.S. producer prices fell a seasonally-adjusted 0.9% in August, the U.S Labor Department announced Friday, as lower energy prices provided some hope that inflation at the wholesale level will moderate in the months ahead.

Economists surveyed by Bloomberg News had expected the August PPI index to fall 0.5%. Producer prices increased 1.2% in July, 1.8% in June, 1.4% in May, and 0.3% in April.

Meanwhile, the core rate, which excludes food and energy costs, increased 0.2%, the Labor Department said, in-line with the Bloomberg News 0.2% consensus estimate.

Economist Peter Dawson told BloggingStocks Friday the August PPI is a pleasant sight for a U.S. market and an economy that's grappling with a series of financial and economic hurdles.

"The report shows a pull-back in energy prices, which is welcome, as it's been the primary culprit in both wholesale and retail inflation," Dawson said. "If wholesale prices continue to trend lower, that will ease pressure businesses face to raise prices to keep pace with costs. Lower oil and gasoline prices will also provide a modest amount of stimulus to the U.S. economy, as it will increase consumer disposable income."

U.S. producer prices soared a seasonally-adjusted 1.8% in June, the U.S Labor Department announced Tuesday, as rising energy prices continued to increase wholesale costs at an alarming rate.

Economists surveyed by Bloomberg News had expected the June PPI index to rise 1.4%. Producer prices increased 1.4% in May and 0.2% in April.

The core rate, which excludes food and energy costs, increased 0.2%, the Labor Department said, below the Bloomberg News 0.3% consensus estimate.

Economist Peter Dawson told BloggingStocks Tuesday the June PPI is another unfortunate data point for the economy, but it's not as bad as it appears. "The report is bad, but not as bad as it could have been. Energy really drove the index higher. If you took out gasoline prices, PPI would be down a half percentage point," Dawson said. "That said, energy prices are still rising at an alarming rate and they're a cost concern for businesses and individuals alike."

The April 2008 producer price data indicated that inflation, as measured at the business or wholesale level, is accelerating. But investors and consumers shouldn't be surprised, so says economist David H. Wang.

"It's beginning to look like a re-run of a show we don't want to see, 'That 70s inflation show,' " Wang said. "Oil is increasing inflation throughout the U.S. economy and you can really see it at the producer level."

During the past 12 months, producer prices have increased 6.5% and the core rate has risen 3.0%, according to U.S. Labor Department data released Tuesday. Other producer price index surges occurred in 1974, 1980, and 1991. What do the three have in common? You guessed it. They were periods when the price of oil increased by a large percentage, Wang said. The 1991 event was more of an oil spike, but the other two were the first two oil shocks, in 1973-1974 and 1979-1980, he said.

Oil's current march higher, up 100% in the past 12 months to about $129 per barrel, and up about 480% since 2002, does not qualify as an oil shock just yet, but it's close and getting there, Wang said, and inflation has trended higher in tandem with oil's latest run-up.

U.S. producer prices increased a scant 0.2% in April 2008, as auto and furniture costs offset substantial rises in food and energy prices, the U.S Labor Department announced Tuesday.

However, the core rate, which excludes food and energy costs, increased 0.4% -- a pace well above consensus expectations. Economists surveyed by Bloomberg News had expected the April 2008 PPI index and core rate to increase by 0.4% and 0.2% respectively.

So far in 2008, producer prices are increasing at an alarming annual rate, 8.5%, compared to 8.4% for the same period a year ago. The core rate is increasing at a 5.2% annual pace, compared to 2.1% for a year ago.

12-month PPI accelerates

For the past 12 months, producer prices have increased 6.5%, and the core rate has risen 3.0%. The core rate's advance is the largest year-over-year core rate increase since 1991.

March producer prices increased by more than double the amount forecast, as higher fuel and food costs worked their way into the commercial system, the U.S Labor Department announced Tuesday.

Producer prices increased 1.1% in March 2008, while the core rate, which excludes food and energy costs, increased 0.2%, the Labor Department said.

Economists surveyed by Bloomberg News had expected the March 2008 PPI index and core rate to increase by 0.5% and 0.2%, respectively.

PPI surging

So far in 2008, producer prices are increasing at an alarming rate, a 10.2% annual rate, compared to 8.4% for the same period a year ago. The core is increasing at a 5% annual pace, compared 2% for a year ago.

For the past 12 months, producer prices have increased 6.9%, and the core rate has risen 2.7%.

Economist Steve Affinito told BloggingStocks Tuesday the March statistic is more evidence of the effects of record-high oil prices. "It's another hot number, and cost pressures are increasing," Affinito said. "The core PPI is somewhat deceptive because we can see the effect of high oil costs working their way through the commercial process. No question, PPI inflation is rising, which means consumer prices will increase."

In March 2008, food prices rose 1.2%, led by an 8.7% increase in the price of rice, and a 15.4% increase in vegatables. Energy costs rose 2.9%, led by a 15% increase in diesel and a 13% increase in home heating oil. Raw material costs surged 8.8%. Auto costs fell 0.2%.

The U.S. Labor Department announced Tuesday producer prices surged 1.0% in January 2008 on energy costs, well above the 0.3% consensus estimate.

Meanwhile, the core PPI rate, which excludes food and energy costs, increased 0.4%, also well above the 0.2% estimate.

The 1% January 2008 PPI increase follows a 0.3% increase in December 2007.

Economist Steve Affinito told BloggingStocks Tuesday the January PPI stat is going to make it very rough for the U.S. Federal Reserve to maintain low interest rates for a long period of time.

Fed won't be pleased

"Wow! This number is hot, really above what we expected," Affinito said. "This almost guarantees that the Fed will be raising interest rates in a year about as fast as they lowered them this year. We have accelerating inflation at the wholesale level, so expect the Fed to clamp down on these inflationary pressures at the first sign they believe the economy is growing."

Well, to quote Yogi, the U.S.'s economic future ain't what it used to be, but as my BloggingStocks colleague Peter Cohan observed, it may not be what some economists currently make it out to be, either.

Cohan asked "Is the 'recession' real?" and argued that one could make a case that not enough evidence exists to suggest the U.S. is in recession -- two consecutive quarters of negative GDP growth has not been measure yet. Further, some sectors of the economy, including oil, oil services, energy, alternative energy, and farming, among others, are doing well.

Still, housing is in its worst slump in more than 20 years, consumer spending growth is modest at best, consumer confidence is low, and one need not list the litany of concerns regarding mortgage lenders and related asset-back securities and banks.

What's going on here?

Producer prices fell 0.1% in December 2007, below the 0.2% consensus estimate, the U.S. Labor Department announced Tuesday.

Meanwhile, the core PPI rate, which excludes food and energy, increased 0.2%, in-line with the 0.2% estimate. In December, wholesale energy prices fell 1.9%, while food prices increased 1.3%

2007 PPI at uncomfortable levels

Still, despite December's mild PPI report, producer prices increased at an above-average rate of 6.3% during 2007 -- the index's biggest jump since rising 7.1% in 1981 -- and well ahead of the 1.1% rise for 2006. Core PPI increased 2.0% in 2007, the same rate as 2006.

The U.S. Federal Reserve uses the PPI as one gauge for both wholesale-based and consumer-based inflation. Historically, a rise in PPI generally signals a rise in consumer prices down the road.

Economic Analysis: A good news / bad news PPI statistic. December's 0.1% PPI decline is welcome news, but it caps a terrible year for prices at the wholesale / commercial level driven by surging commodity costs. Even so, the 2007 PPI performance is unlikely to change the U.S. Federal Reserve's easing monetary policy stance. Further, analysts expect wholesale inflation to moderate slightly in 2008, due to a slowdown in the U.S. economy.