Who are exaggerating the inflationary pressure?

For those who are interested in dynamics of the US financial market, the following article will be useful. You will see how the US financial investors (most of them are main beneficiaries from the Bush administration's extended tax cuts) are responding to the US Fed modest monetary policy. -----

NYtimes May 12, 2006

Inflation Stirs Worry on Wall St.

By JEREMY W. PETERS and VIKAS BAJAJ

Stock prices fell sharply and broadly yesterday as investors worried that rising oil prices would quicken the pace of inflation and force policy makers to raise interest rates further.

The abrupt drop, which was the largest since January, came after several days of modest but steady increases in the Dow Jones industrial average, which as recently as Wednesday was within 80 points of its record high. It also came a day after the Federal Reserve indicated that it was ambiguous about whether it would raise rates later this year.

The Standard & Poor's 500-stock index fell 1.3 percent yesterday, to 1,305.92, with all but 59 of the stocks in the index losing ground. The Dow Jones industrial average declined 1.2 percent, to 11,500.73, and the Nasdaq composite index fell 2 percent, to 2,272.70.

Though consumer prices excluding energy and food have risen only modestly thus far, investors and policy makers are increasingly concerned that higher gasoline and commodity prices coupled with faster economic growth will drive up inflation in the coming months.

In March, one measure of inflation favored by the Fed — prices for personal spending excluding food and energy — rose at an annual rate of 2 percent, the upper end of a range the Fed considers healthy, from 1.8 percent in February.

The price of gold, which has soared this year and is considered a safe haven during periods of rising inflation, rose 2.2 percent yesterday, to $721.50 an ounce.

"Inflation is creeping into the mind-set here in a bigger and bigger way," said Jim Paulsen, the chief investment strategist at Wells Capital Management.

The inflationary threat in higher energy prices was heightened as crude oil climbed for a third day. The June contract rose 1.6 percent, to $73.32 a barrel, on the New York Mercantile Exchange. Nationally, retail gasoline prices averaged $2.88 a gallon yesterday, up from $2.69 a month ago, according to AAA.

Mr. Paulsen said the signs of inflation coupled with a weaker dollar, which has fallen 8.3 percent against the euro so far this year, have introduced a new element of pessimism to the market.

One analyst attributed investors' jitteriness to the open-ended nature of the statement the Fed issued on Wednesday after it raised short-term interest rates a quarter-point, to 5 percent, its 16th consecutive increase over two years. Policy makers indicated that they might still need to raise rates further, but emphasized that their decision would depend on future economic data.

Under Alan Greenspan, the former Fed chairman, Wall Street became accustomed to parsing concise statements and divining, with a fair degree of certainty, policy makers' intentions. Since Ben S. Bernanke took over in February, the Fed has begun issuing longer statements that provide more context for its decisions and its thinking but also leave more room for interpretation.

Government bonds also fell yesterday; the yield on the 10-year Treasury note, which moves in the opposite direction from the price, rose to 5.15 percent yesterday from 5.12 percent on Wednesday.

The slide in stocks was led by the insurance giant American International Group, which fell $3.39, or 5.1 percent, to $63.15, after reporting disappointing first-quarter earnings after the market closed on Wednesday.

Shares of General Motors fell after a Wall Street analyst said he expected the company's unabated loss of market share in the United States would complicate its efforts for recovery this year. Shares of G.M. dropped 78 cents, to $25.81 yesterday.

Still, some analysts suggested that the strong economy and growing corporate profits would ensure that yesterday's fall would prove to be a blip in an otherwise rising market. So far this year, the Dow is up 7.3 percent, the S.& P. 500 has risen 4.6 percent and the Nasdaq is up 3 percent.