Today's Philly Fed current activity index came at what at first glance appears to be a healthy 24.3 in December from 22.5 in November on expectations of 15.0. Great right? Nope. Reading between the lines shows that the critical Employment index dropped from 13.3 to 5.1, and further confirming the weakness in employment was the plunge in number of employees which dropped from 13.3 to 5.1: all other indicators merely confirmed yet another inventory driven short-term boost (pre-liquidation). Just as important, shipments plunged from 16.8 to 7.3 in one month. Yet what was most notable is the absolute explosion in the Prices Paid index which followed mortgage yields in going parabolic. From 34 in November, the Price Paid index surged to 51.2! Recall David Rosenberg discussing the mother of all margin squeezes yesterday... It's here. From the index: "Price increases for inputs as well as firms’ own manufactured goods are more widespread this month. Fifty?two percent of the firms reported higher prices for inputs, compared with 38 percent in the previous month. The prices paid index, which increased 17 points this month, has increased 41 points over the past three months. On balance, firms also reported a rise in prices for manufactured goods: More firms reported increases in prices (21 percent) than reported decreases (10 percent), and the prices received index increased 13 points, its first positive reading in eight months." Add to this the earlier comments from Fedex that the main reason for the EPS miss (not so much revenue) was due to a spike in labor costs, and one wonders: Quo Vadis Deflation?