Economic Bliss Fuels Stock Rally
Inflation remained benign last month despite the worst spike in gasoline prices since the Gulf War. At the same time, factories churned out their largest production increase in 16 months.
Wall Street rallied in response Tuesday, with the Dow Jones average of industrial stocks soaring 174.78 points to close at 7,895.92.
“The best of all possible worlds continues,” explained economist Lynn Reaser of Barnett Banks Inc. in Jacksonville, Fla. “The economy remains well-balanced with strong growth but low inflation.”
Declines in clothing costs, car prices and airline tickets helped hold the overall increase in consumer prices to a moderate seasonally adjusted 0.2 percent in August, the Labor Department said. They counterbalanced big increases for gasoline and fruits and vegetables.
For the first eight months of this year, the Consumer Price Index has been rising at an annual rate of just 1.6 percent, less than half the 3.3 percent increase in 1996.
Excluding energy and food, which tend to jump around from month to month, prices rose a scant 0.1 percent in August. They’re increasing at a 2.2 percent rate so far this year, even better than the 2.6 percent rise for all of last year.
Bond prices shot up after the report’s release, pushing down the yield on the 30-year Treasury bond - a barometer of mortgage rates and other long-term borrowing costs - to 6.40 percent, from 6.57 percent a day earlier.
And the report left economists betting Federal Reserve policy-makers would find little need to increase short-term interest rates at their next meeting on Sept. 30. But they said a rate increase remains possible after either the Nov. 12 or Dec. 16 meeting.
“If the data play out as they did today, the Federal Reserve will never have to raise interest rates,” said economist Allen Sinai of Primark Decision Economics in New York. “The question is, will the data continue to show the same pattern? Probably not.”
Analysts have been watching closely - mostly in vain - for signs the strong economy is pressuring inflation higher. But mildly worrisome readings on wages and factory operating rates emerged Tuesday.
According to the Labor Department, inflation-adjusted weekly earnings jumped 0.8 percent in August, the largest increase in six months. For the year, they’re up 2.1 percent.
Meanwhile, the Federal Reserve said a 0.7 percent advance in production pushed the operating rate at factories, mines and utilities to 83.9 percent of capacity, the highest since September 1995.
“The standard analysis is … when we get above 83, it’s time to get concerned,” said economist Kurt Karl of the WEFA Group in Eddystone, Pa. “It’s not a big worry of something happening immediately, but it’s something you’ve got to watch.”
xxxx DOW SURGES The Dow Jones industrial average shot up nearly 175 points Tuesday, its fourth-largest gain.