Is This Fear Holding the Dow Back This Morning?

On a morning on which the National Association of Home Builders announced extremely favorable conditions for the housing industry, as well as rising industrial production figures, you'd expect the stock market to be primed to continue its run-up toward ever-higher record levels. Yet as of 10:45 a.m. EDT, the Dow Jones Industrials (DJINDICES: ^DJI  ) are actually down four points, and the most likely culprit for the drop is the latest news on the Consumer Price Index.

Why the CPI rose sharply today
The Bureau of Labor Statistics reported that overall, prices rose 0.5% during the month of June. That marked the biggest increase since February, and it represents another data point suggesting that low interest rates could finally be starting to show up in rising prices at the retail level.

However, looking more deeply at the numbers once again reveals the huge influence that rising energy prices have had on the CPI. Energy prices rose 3.4% during the month, with gasoline prices jumping more than 6%. Yet both Chevron (NYSE: CVX  ) and ExxonMobil (NYSE: XOM  ) are trading lower today despite rising oil prices, showing that even energy stocks don't always benefit from inflationary pressure, because higher prices spur oil consumers to reduce their consumption. When you take out the volatile food and energy segments, core CPI rose just 0.2%, adding up to a 1.6% gain over the past year. That level is low enough to give the Federal Reserve latitude to maintain its accommodative monetary policies a bit longer.

Investors saw the impact of the inflation numbers on the price of inflation-indexed bonds. The iShares Barclays TIPS Bond ETF (NYSEMKT: TIP  ) has risen 0.3% on the day. Treasury Inflation-Protected Securities, or TIPS, benefit from the rising CPI, as the bonds see their face value at maturity rise to reflect increasing price levels.

Is inflation that important?
Yet another fear that's keeping the Dow back has to do with earnings reports. Coca-Cola (NYSE: KO  ) has fallen more than 2% this morning after it reported disappointing revenue figures for its second quarter. The company reported sales volume growth of just 1%, pointing to weakness in economies just about everywhere outside North America and adverse weather patterns that led to fewer soft-drink purchases. The strength of the dollar versus foreign currencies also held earnings back, and falling sales volumes in North America pose a threat to its continued growth. Given the weakness in demand, Coke would be hard-pressed to pass on higher costs to its customers if inflation were to flare up again.

For now, inflation doesn't seem to be an imminent threat to the stock market or the U.S. economy. So long as the core CPI doesn't reflect companies passing through higher energy costs to consumers, then the Dow shouldn't have to worry about inflation as a lasting obstacle to further record highs.

Smart investing ideas take inflation into account. Find some great ones in our special report, "The 3 Dow Stocks Dividend Investors Need." It's absolutely free, so simply click here now and get your copy today.


Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2539628, ~/Articles/ArticleHandler.aspx, 10/20/2014 10:04:27 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement