Inflation contributes to volatile markets

Wednesday, April 27, 2005 at 1:00am

Last week was marked by increasing volatility in the stock markets, oil prices increasing more than 10 percent to move back into the mid-$50-per-barrel range, and several companies, notably in the technology sector, reporting better-than-expected first-quarter earnings. For the week, the Dow Jones Industrial Average climbed 0.7 percent to close at 10,158, the S&P 500 Index rose by 0.8 percent to end the week at 1,152, and the Nasdaq Composite added 1.3 percent to close at 1,932.

Last week, the Labor Department reported that the Consumer Price Index (CPI), one of the most widely watched measures of inflation, rose by 0.6 percent in March, the biggest jump in several months. Even more significantly, core CPI (which excludes volatile food and energy prices) rose 0.4 percent, the largest increase in more than two years. These numbers helped to reinforce the broad view that the Federal Reserve will continue in its campaign of tightening monetary policy by hiking interest rates in its attempt to combat inflation.

The current state of affairs prompts us to make three observations. First, with both interest rates and energy prices moving higher, we believe that consumer discretionary income will be impacted and that we will experience some sort of slowdown in economic growth in the second half of the year.

Second, unlike last year when oil prices moved up, this year

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