Inflation, Rate Worries Cloud Investor Outlook

Stocks could show some weakness this week as earnings season winds down, while inflation and interest rate worries may stoke investors’ concerns about future profits.

Oil prices that have again risen past $48 a barrel also could keep up the pressure on the markets.

Last week, Wall Street got a warning shot from a bigger-than-expected jump in U.S. producer prices, excluding food and energy. The core producer price index rose 0.8% in January, the government reported.

That increase -- the biggest since December 1998 and well above the Street’s expectation for a 0.2% rise -- fanned inflation fears and bolstered a growing expectation that the Federal Reserve would keep raising interest rates well into the year.

Indeed, the PPI report came on the heels of Federal Reserve Chairman Alan Greenspan’s remarks to Congress that interest rates were still “fairly low,” a signal that they will keep rising.

“I see a weak market as investors digest the earnings news, Greenspan’s testimony and the producer prices data, which is clearly inflationary,” said Tim Ghriskey, chief investment officer of Solaris Asset Management in Bedford Hills, N.Y.

Inflation pressures, higher interest rates and high oil prices not only will hurt consumer spending but also will raise the cost of doing business, strategists said. That spells bad news for corporate profits, already headed for a slowdown this year, they noted.

In such an environment, the U.S. consumer price index for January, which will give a reading on inflation at the retail price level, will be closely watched this week.

“The CPI report Wednesday will be important as investors will be looking to see if the jump in producer prices will translate into a rise in consumer prices,” said Michael Sheldon, chief market strategist at brokerage firm Spencer Clarke in New York.

“If that happens, it will be a negative for the stock market as it will signal that the Fed will have to get more aggressive in raising rates to combat inflation,” he added. “Further, higher prices in general and higher interest rates will weigh on consumer spending.”

Both the overall consumer price index and the core CPI, which excludes volatile food and energy prices, are expected to have risen 0.2% in January, according to economists polled by Reuters.