Business > Fears of Rising Inflation Send Shares to New Lows for '05" href="http://www.nytimes.com/2005/04/21/business/21econ.html?pagewanted=1&th&emc=th">The New York Times > Business > Fears of Rising Inflation Send Shares to New Lows for '05
Fears of rising inflation sent stocks to new lows for the year yesterday after the government reported a sharp increase in consumer prices that all but guaranteed that the Federal Reserve would continue to push interest rates higher even as the economy may be slowing. Last week investors were worried about the effect of slower economic growth on corporate earnings. The addition of inflation fears to the mix could put nerves on Wall Street even more on edge.
A 0.6 percent increase in the Consumer Price Index last month was the largest in five months, the government reported. The 0.4 percent jump in the core rate, which excludes food and energy, was twice the forecast from analysts and the biggest monthly increase in nearly four years.
While some economists predicted that inflation should moderate in coming months, higher energy costs have pushed consumer prices steadily higher so that they have been running at an annual rate of 3 percent or more for several months.
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Indications of a slight weakening in the economy - auto sales off, retail sales slowing, wages still losing ground to inflation, job growth below par - have many forecasters marking down their expectations for economic growth to an annual rate of 3 percent to 3.5 percent in the second quarter from 3.8 percent in the fourth quarter.
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April 21, 2005
Fears of Rising Inflation Send Shares to New Lows for '05
By JONATHAN FUERBRINGER and LOUIS UCHITELLE
ears of rising inflation sent stocks to new lows for the year yesterday after the government reported a sharp increase in consumer prices that all but guaranteed that the Federal Reserve would continue to push interest rates higher even as the economy may be slowing.
Last week investors were worried about the effect of slower economic growth on corporate earnings. The addition of inflation fears to the mix could put nerves on Wall Street even more on edge.
A 0.6 percent increase in the Consumer Price Index last month was the largest in five months, the government reported. The 0.4 percent jump in the core rate, which excludes food and energy, was twice the forecast from analysts and the biggest monthly increase in nearly four years.
While some economists predicted that inflation should moderate in coming months, higher energy costs have pushed consumer prices steadily higher so that they have been running at an annual rate of 3 percent or more for several months.
In the New York metropolitan region, inflation was considerably stronger than at the national level, rising 1.7 percent in March in the largest month-over-month increase in 23 years. [Page B4.]
Stocks fell further in the afternoon after the Federal Reserve reported its summary of economic activity around the country. The major theme of the report was that cost pressures have been rising and that businesses had been able to pass them on in higher prices.
With inflation moving to the top of the range that Fed policy makers consider acceptable, analysts said, they may have little choice but to push rates steadily higher even if such actions threaten to slow economic activity further.
"The disappointing inflation news suggests that the Fed will now have to see something more dramatic in economic weakness before they consider pausing" in raising rates, said Robert J. Barbera, chief economist at ITG/Hoenig, a brokerage firm in Rye Brook, N.Y.
Slow growth and rising prices were the hallmark of the 1970's and were called stagflation. While no one is saying the economy faces such an illness now, even a hint of stagflation makes the Fed's job more difficult.
"This will make it tough on them if they want to get more aggressive in raising interest rates because they could be accused of endangering the economic recovery," Mr. Barbera said.
Yesterday's stock decline quickly ended a pause after shares plunged three consecutive days last week, from Wednesday through Friday, in their worst week since August.
With a 1.1 percent decline yesterday, the Dow Jones industrial average has now given up all of the 9 percent rally it experienced from the day after the presidential election through March 4, when the Dow hit its 2005 high just 59 points shy of 11,000. After falling 115.05 points yesterday, to 10,012.36, it is now threatening to break below 10,000, and is down 7.2 percent for the year.
The broader Standard & Poor's 500-stock index dropped 15.28 points, or 1.3 percent, to 1,137.50, putting it only 7 points above its Election Day level. It is now down 6.1 percent for the year.
The Nasdaq composite index dropped 18.60 points, or 1 percent, to 1,913.76, about 5 points from the 2005 low it hit Friday. That was the lowest level since mid-October, before the post-election rally. The Nasdaq is down 12 percent in 2005.
The afternoon sell-off was powerful enough to overwhelm the performance of stocks that reported surprisingly good earnings for the first quarter, including Intel and Caterpillar. Many investors were hoping that better-than-expected earnings from several bellwether companies would help the stock market rebound.
Intel, which reported after the market closed Tuesday that its profits jumped 25 percent, was up as much as 3.4 percent in early trading, but closed up just 3 cents, or 0.1 percent, at $22.66. Caterpillar, whose earnings swelled by 38 percent for the first quarter, was up as much as 6.1 percent, but finished up $3.09, or 3.6 percent, at $88.04.
After the market closed, eBay reported another strong quarterly earnings gain of 28 percent.
For millions of investors, the new inflation figures make sorting out the economy, stocks and interest rates even more difficult.
"I think it is very confusing," said Henry Herrmann, chief investment officer at Waddell & Reed in Overland Park, Kan. It appears that "the stock market believes that inflation is going to lead the Federal Reserve to overshoot," he added, by raising its short-term benchmark rate so aggressively that economic growth would suffer too much.
Federal Reserve policy makers are expected to increase the short-term rate they control to 3 percent at their May 4 meeting in what would be the eighth consecutive quarter- point increase in less than a year.
The bond market's reaction to the inflation news may also be confusing for investors, because inflation fears usually drive bond prices lower and yields higher. After falling early, prices of the Treasury's 10-year note rebounded to rise 6/32, to 9816/32. The yield, which moves in the opposite direction, fell to 4.19 percent, from 4.21 percent Tuesday.
"People are worried about stocks and the soft patch in the economy and you are having a flight to quality," said Scott Gewirtz, co-head of government bond trading at Deutsche Bank.
Indications of a slight weakening in the economy - auto sales off, retail sales slowing, wages still losing ground to inflation, job growth below par - have many forecasters marking down their expectations for economic growth to an annual rate of 3 percent to 3.5 percent in the second quarter from 3.8 percent in the fourth quarter.
"If anything is pinching family budgets right now, it is their experience every day at the gas station," said Jared Bernstein, a senior economist at the Economic Policy Institute. "That constrains their budgets more than interest rates. If they are spending more at the pump, they have to be spending less elsewhere."
Yesterday, the price of crude oil for June delivery on the New York Mercantile Exchange rose 46 cents, or 0.9 percent, to $54.03 a barrel, not far below its record high. While oil prices are not included in the core inflation rate, they appear to be a contributing factor in the rise in other prices.
"The underlying trend is up, and that is largely because of the oil pass-through," said Nigel Gault, chief domestic economist at Global Insight.
Still, last month's 0.4 percent jump in the core rate may not be as threatening as it appeared at first glance because of seasonal aberrations. One major contributor was a sharp jump in hotel room rates, perhaps because the Easter week holiday fell in March; similarly a big jump in spring apparel prices may also have been affected by the timing of the holiday. Neither spike is likely to be repeated in April.
But the broader inflation rate shows no signs of diminishing. Half of the rise in the overall index was from rising gasoline prices, the Bureau of Labor Statistics said. They averaged $2.09 a gallon, up from $1.91 in February, according to Energy Department surveys, and in the first half of April the average rose again, to $2.24 a gallon, foreshadowing still another sharp increase in the Consumer Price Index.
For the 12 months ended in March, the overall inflation rate for consumers was 3.1 percent compared with 2.5 percent last September and 1.7 percent in March 2004.
Copyright 2005 The New York Times Company
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