Markets take a dive on inflation news

A trader takes a break from the floor outside the New York Stock Exchange May 17, 2006 in New York City. Stocks fell sharply in afternoon trading following a stronger-than-expected rise in consumer inflation.

KAI RYSSDAL: It's Wednesday, May 17th, today. And let me take you back about a week. The Dow closed within spitting distance of its all-time high. Just 80 points short. But the blue chips have been in a nosedive since then. Today the Dow Industrials fell almost 2 percent. The Nasdaq's back to where it started in January. Marketplace's Business Editor Cheryl Glaser reports the "I" word is raising its ugly head.


CHERYL GLASER: Today's numbers confirm what we've all been feeling. Inflation is no longer just a pain at the gas pump. It's seeping into other parts of the economy, too. Prices for clothing, medical care, and education -- as well as apartment rents -- are all on the rise.

What's driving it? Those higher fuel costs are at least partly to blame. They raise the price of doing business. Two more companies -- Continental Airlines and DuPont -- said today they're gonna pass along some of those higher fuel costs to customers.

But we may also be seeing some fallout from higher wages says Standard & Poors Chief Economist David Wyss:

DAVID WYSS:"Two out of the last three months we've seen some pretty hefty wage increases. And we're afraid some of that's getting passed through."

And then there's the slump in the dollar. That makes imports more expensive -- like many of our clothes, which come from Asia. Add it all up, and you've got inflation running at an annual rate of more than 5 percent so far this year.

Economist Hugh Johnson says that's a signal for the Fed to attack now before inflation gets outta control:

HUGH JOHNSON:"The big concern of course is that the Federal Reserve will be very worried, too worried about inflation, and raise interest rates too high."

And, he says, that could kill off the economic recovery and the bull market.

Mark Zandi of Moody's Economy.com says the threat of inflation and higher interest rates isn't just a problem for Wall Street:

MARK ZANDI:"If you want to go buy a home, it's gonna be a lot more costly to get a mortgage to do it. If you want to buy a vehicle, it's going to cost you more to finance it. Your credit card bill is going to reflect the higher rates. If you have a home equity line, your payments are gonna to start to rise."

But the Fed can wait a while longer before making a move. It'll get one more report on consumer prices before it meets again next month.

I'm Cheryl Glaser for Marketplace.

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