Price may rise, a little bit

The Fed has so far succeeded in turning an "inflation expectation" up at least a little bit in Americans' mind.

According to the latest two regional reports, manufacturers in New York and Philadelphia answered in November that prices will jump in the future. The index of prices received in the next 6 months in New York rose from 20 in October to 35.06 in November, the highest since October 2008. The same index in Philadelphia also increased from 15 to 33.4, the highest since July 2008. Philadelphia manufacturers saw the current prices rising somewhat, while prices in New York declined from the previous month.

This news should be encouraging if the Fed is going to create an "inflation expectation" to avoid deflation given the current inflation rate is hovering as low as around 1%. The problem is that it's not clear how much prices rise, and how long this persists.

Let me give you an example. Since the Fed embarked on QE2 earlier this month, US Treasury securities have been dumped so that the benchmark 10-year note's yield rose to nearly 3%, the highest in 3 months. But this has come mostly from the rise in real yields, not inflation expectation.

My guess is that prices will rise somewhat in the coming months, which is supposed to be reflected in the next ISM reports. The rise in prices, however, would be so small that it takes many months to reach the Fed's implicit price target of 1.7 to 2.0%.