Today's release of the Producer Price Index (PPI) and Retail Sales (RS) figures reflect our recent concerns over the deflationary forces penetrating the U.S. economy from a combination of the weakening demand and global economics. PPI showed a stunner decline of 1% over the last month with the year-over-year change falling by 50% from 1.9% to just 0.8%.

The recent decline in crude oil prices are working their way through the system again which has led to softer food prices. While this does ease the burdens on the consumer in the short term by acting as a tax credit there is negative impacts to the economy from deflationary pressures. The ratio of crude goods to finished prices, a kind of book-to-bill ratio for manufacturers, has continued its decline after peaking early in 2011 at 1.35. The important concept is that this ratio has only been above the 1.3 level four times in the history of the index going back to 1947. Each time the economy was either in, or soon to be in, a recession.

At the core PPI rose by 0.2% last month and 2.8% on a year over year basis. Core PPI will likely decline over the next couple of months as deflationary pressures continue to cycle through the economy which ultimately attacks profit margins which have already come under pressure over the last couple of quarters.

Tomorrow we will get the release of the Consumer Price Index (CPI) which will allow us to produce our composite index for a better look at the inflation/deflation pressures on the economy. The one important point here is that we expect CPI to decline tomorrow as well which will clear the way for the Fed to enact another round of monetary stimulus later this summer.

While there are many calls for Bernanke to announce QE at the June FOMC meeting, while possible, I think this is a fairly low probability event. Bernanke will likely wait to get a final read on first quarter GDP with some early diagnosis on 2nd quarter as well. With inflation taming, and the markets not absolutely collapsing at this point, my best guess is that he may hint at QE at the next meeting to gauge market response. As QE programs are highly inflationary we will likely wait until the end of summer, with a possibility of post election, to announce the next round of stimulative action. Make no mistake - there is no real organic growth occurring in the economy and no support coming from Washington. There will be further stimulative programs in the future — it is only a question of when.