When conducting our analysis of likely monetary policy actions to be taken by the Federal Reserve, we focus our work on the same sets of economic data watched by the Fed. Many of the major economic indicators are pointing in a positive direction as evidenced by economic releases last week. Employment is improving based on continued declines in first time claims for unemployment benefits. The figure, released on Thursday, came in at 326k, bringing the six month moving average to 348k from 363k late last year, and points to an upward revision to December’s weaker than expected non-farm payroll number. Economic growth continues to pick up. GDP estimates from economists for both the 4th quarter of 2013 and the full year 2014 are moving higher. Manufacturing is playing a large part in this optimism with regional manufacturing indices such as the NY and Philadelphia Fed manufacturing indicators printing in solidly positive territory last week. The one area that is causing concern for the Fed is the weakness in inflation. The Consumer Price Core Index reported +1.7% y/y growth on Thursday, and while the Fed prefers to use the PCE (Personal Consumption Expenditures) index to gauge inflation, this number was referenced by three Fed Governors (including outgoing Chairman Bernanke) in speeches last week. The bottom line for SNW portfolios is that inflation is now the most important metric to watch as it will likely dictate monetary policy, and through that, the direction of interest rates, in 2014.