The Federal Reserve Bank’s Chairman Ben S. Bernanke spoke yesterday in New York over the economic outlook for the world’s largest economy, whereas Bernanke signaled that the economy is still facing challenges ahead amid rising unemployment and tightened credit conditions, while Bernanke also signaled that inflation will probably remain subdued for some time, as this comes ahead of today’s PPI which is expected to show that inflation is still under control.

Bernanke also signaled in his speech yesterday that inflation expectations over the long run are stable, however, rising energy prices and the overall drop in the dollar’s value might create some problems for the Feds, though Bernanke signaled his support for a strong dollar policy, yet given the recent developments, it seems that the dollar will continue to lose value against major currencies.

Also, we shouldn’t forget the huge increase in money supply amid the hefty amounts of liquidity that were pumped into the financial system in order to facilitate lending and help ease credit conditions, and the aftermath of rising money supply should be reflected with higher inflation over the medium to long terms, though the Feds still believe they will be able to withdraw excess liquidity from markets, but that remains to be seen.

Moreover, rising energy prices have been increasing inflationary pressures recently at least on monthly basis, as on yearly basis inflation remains well undermined, yet eventually those increases will be reflected and accordingly the Feds should have a plan ready in order to counter upside risks to inflation once they start to materialize.

The producer price index will be released for the month of October today, whereas PPI is expected to have risen by 0.5% following the prior reported drop of -0.6% back in September, while compared with a year earlier PPI is expected to have dropped by 1.8% following the prior reported drop of 4.8%.

Moreover, core PPI which excludes energy and food prices is expected to rise by 0.1% in October following the prior reported drop of 0.1%, while compared with a year earlier, core PPI is expected to ease slightly to 1.4% from the prior reported rise of 1.8%.

The outlook for inflation remains somehow unclear, as the recent increase in economic activity will be reflected eventually on inflation, while given that money supply is already inflated, we should expect inflation to start soaring once economic conditions start to stabilize, however, I believe it’s still early to say that inflation will represent a problem at least not in the near future, as the Feds still have to worry about any possible deterioration in economic activity.

Meanwhile, the net long term TIC flows will be released for the month of September, as it’s expected to rise to $30.0 billion from the prior reported estimate of $28.6 billion. The recent rally in stock markets have been supporting further investments, especially since the worst part of this crisis seems to be over already, and accordingly faith is starting to return into financial markets, and that could prove to be vital for the course of the recovery.

Moreover, the industrial production index will be released today as well, whereas industrial production is expected to rise in October by 0.4% following the prior reported rise of 0.7%, while capacity utilization is expected to rise slightly to 70.8% from 70.5% reported back in September, as economic conditions continue to improve gradually.

Capacity utilization is considered an inflationary gauge, since it measures how much resources are being used by factories, while though the index have been rising over the past few months to reflect probably the recent increase in economic activity, yet we are still far from recovery, as demand levels are still rather weak and it will probably take some time before demand recovery fully.

Rising unemployment and tightened credit conditions will probably continue to weigh down on economic activity over the upcoming period, especially as officials from the Federal Reserve Bank expect unemployment to remain elevated for an extended period, and they also believe that elevated unemployment levels might hurt the recovery, and accordingly Mr. Bernanke was rather uncertain over the outlook for the economy, as he still signaled that there are still possibilities of further setbacks in the future…