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Analysts say inflation signs
show recovery is under wayThe stock market has been selling off
over interest-rate fears
NEW YORK » Higher prices for everything from gas and groceries to industrial commodities and labor have translated into a gigantic "sell" signal for Wall Street, and left little doubt that inflation is on its way back.
With the Federal Reserve contemplating when, and how much, to raise interest rates, inflation is an increasingly worrisome factor for stock investors. But analysts say a modest rise in inflation is a necessary part of the economic recovery, and not necessarily something to fear.
"A couple percentage points of inflation is not that big a deal. It just shows the economy is growing," said Mitch Zacks, director of research at Zacks Investment Research in Chicago. "Generally, as the economy grows, prices start to rise. ... It's times of hyper-inflation when things break down."
It was only a few months ago that the Fed was concerned about deflation, which happens when prices fall too quickly. The core inflation rate now hovers between 1 percent and 2 percent, and is likely to rise further as the Fed tightens rates, perhaps as early as this summer. Economists say this kind of inflation is a healthy side effect of growth, and far from the damaging pricing pressures of the 1970s and '80s, when inflation was measured in double digits, and mortgage rates were as high as 15 percent.
"The market loves inflation of about 2 to 3 percent," said Alfred E. Goldman, chief market strategist with A.G. Edwards & Sons Inc. in St. Louis. "It means the economy is growing, and corporate America can raise the price of its products, and earnings can rise."
But Goldman is part of a contrarian market segment that has questioned whether the Fed is actually doing enough to stop more dramatic inflation before it starts. When inflation gets above 5 percent, it tends to be more unsettling to markets, and more difficult for policy makers to control.
The market, which seesawed after the Fed said it would take a "measured" approach to lifting rates from their current 46-year lows, might have responded more positively to a stronger statement, Goldman said. A promise of "vigilance" on the inflation front might have been more reassuring to investors -- even though that further raises the prospects for higher rates, he said.
"The Fed has one main responsibility, and that is to control inflation. It is a killer for everybody," Goldman said. "If you wait until the evidence is right in your face, it's too late. That's why it's the job of the Fed to start tapping on the brakes sooner rather than later. It's preventive medicine. And that's what a modest rate hike would be."
After 10 quarters of steady corporate growth, and with almost a million jobs created since October, most analysts agree the economy is doing fine. But inflationary pressures have put many on their guard.
Oil topped $40 a barrel yesterday, its highest level since 1990, and prices are rising for other commodities, as well, including copper, tin, steel and lumber. The Institute for Supply Management's monthly survey of purchasing managers showed many are seeing higher prices in the goods they buy. The ISM's purchasing manager's index hit 88 in April, its highest reading since November 1979.
Pricing pressure is reflected in other measures as well. The Labor Department found employment costs rose 1.1 percent in the first quarter, and benefit expenses soared 2.4 percent, the fastest pace in two decades.
There's no doubt investors will be closely watching the government's next reading of the Consumer Price Index, which is due Friday.
For the week, the Dow Jones industrials lost 108.23, or 1.1 percent, closing at 10,117.34.
The Nasdaq composite index fell 2.19, or 0.1 percent, during the week, to finish at 1,917.96. The Standard & Poor's 500 lost 8.60, or 0.8 percent, for a weekly close of 1,098.70. The Russell 2000 index fell 11.24, or 2 percent, to end the week at 548.56.
And the Wilshire 5000 Total Market Index, which tracks more than 5,000 U.S.-based companies, ended the week at 10,686.04 off 107.62 points from the previous week. A year ago the index was 8,883.34.
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