Commentary: Producer prices jumped a surprisingly sharp 1.0% in January – more than doubling the consensus forecast for a gain of 0.4%. The twelve-month growth in aggregate producer prices now stands at a 26-year high. Core producer prices, (a statistical value that strips out the more volatile food and energy components) climbed 0.4%, marking its sharpest one-month gain since last February. The resurgent inflation story contained in this morning’s producer price index combined with last week’s more important consumer price index is leading some investors to pare back their future short-term rate-cut expectations from the Fed. Others believe the Fed will remain aggressive with their short-term rate cutting strategy — continuing to focus on the downside risk to economic growth with the expectation that slower growth will naturally control price pressures. Fed Chairman Bernanke testifies to Congress tomorrow and Thursday on the state of the economy. Investors of every stripe will be listening intently for any signal on how much lower policymakers intend to cut short-term interest rates and what impact additional cuts in the benchmark fed fund rate is expected to have on inflation. I suspect Mr. Bernanke’s recent assessment that “overall inflationary expectations remain contained” will be sharply questioned by members of both Congressional committees. If investors get any sense that the Fed Chairman is shifting his view of the current inflation threat to something more ominous — his sudden shift in position will almost surely wreak havoc on the mortgage market – pushing rates yet higher and slamming prices. Prices have are currently at their best levels of the day as the markets sift through the data from this morning. MBS market is currently down -1/32nds while the Dow is up about 150 points.