EYE ON AMERICA Watch for a surging market
By Peter Morici
On Thursday, the US Labor Department reported that the Consumer Price
Index (CPI) fell 0.5% in October, after falling 0.5% in September.
Seasonally adjusted, food prices were up 0.3% in October, after rising 0.3% and
0.4% in September and August. Energy prices fell 7% in October, after falling
7.2% in September and rising
0.3% in August. Also, transportation and apparel prices fell 3.1% and 0.7%,
respectively.
The Federal Reserve has been particularly concerned about the pass-through into
other sectors of higher petroleum prices, which surged from March through
August, and pressures from the labor market. Federal Reserve policymakers pay
close attention to movements in the CPI, which strips away direct energy costs
and food prices.
Core consumer prices rose 0.1% in October, after rising 0.2% in July, August
and September. Since October 2005, core consumer prices have risen 2.7%, and
the compound annual rate of change for the three months ending in October was
2.3%.
Now the outlook is for core inflation to fall within Fed head Ben Bernanke's
target range of 1-2%. The Federal Reserve should not change interest-rate
policy before its March meeting, and economic growth should recover to between
2.5% and 3% by the first half of next year.
Holiday shopping (for Christmas, Hankah and, next week, the US
Thanksgiving) should give retailers a boost and, along with more robust
commercial construction and business investment, sustain the economic
expansion.
All of this is great news for the stock market.
Falling energy prices, moderating inflation and decent holiday sales will
strengthen corporate profits and investor confidence.
If the new Democratic majority in Congress does not spook the bond and equity
markets with talk of broad spending initiatives, new taxes or overly aggressive
business regulations, the stock market rally should continue into the new year.
Household savings performance will improve, and ordinary investors should shift
from buying bigger homes to investing in stocks. Stock prices should surge.
The biggest surprise of 2007 will be the resilient bull market.
Peter Morici is a professor at the University of Maryland School of
Business and former chief economist at the US International Trade Commission.
