Economic Preview: Election over, investors are back on inflation watch and feeling a little spooked

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Wall Street hasn’t had to worry about rising inflation for a long time, but now investors are feeling anxious.

The results of a superheated 2018 election didn’t bother Wall Street much, but oh, just a whiff of inflation sure did.

U.S. stocks surged after voters divided power in Congress between Democrats and Republicans. But the Dow Jones Industrial Average
DJIA, -0.77%
and S&P 500
SPX, -0.92%
tumbled toward the end of last week, especially after wholesale inflation showed the biggest gain in six years.

The increase was driven by higher gas prices and rising costs for industrial supplies, perhaps a byproduct of Trump administration tariffs on steel and other foreign goods

Read: Wholesale inflation surges in October at fastest pace since 2012

Markets could get another jolt this week after the latest read on inflation at the household level. The consumer price index, out Wednesday, is also forecast to increase sharply in October.

Higher inflation means higher interest rates, and eventually, slower economic growth.

That’s in the future, though.

For one thing, the spike in inflation in October could ease as soon as this month. The price of oil — a hugh influence on inflation — has plunged below $60 after topping $76 a barrel in early October. That decline will soon show up in the inflation numbers.

“With oil in a bear market now, it’s safe to assume relief is in store in November and December,” said chief economist Chris Low of FTN Financial.

Read: Oil extends slide into bear-market territory

Read: There’s still more jobs available than unemployed Americans

The economy, meanwhile, is still growing rapidly, if not quite as fast as in the spring and summer. Economists surveyed by MarketWatch predict gross domestic product — the official measuring stick — will slow to 2.7% in the final three months of the year from the third quarter’s 3.5% and the second quarter’s 4.2%.

The chief reason? Consumers can’t keep spending more than they are earning, as they’ve been doing since the spring.

“Consumer spending gains tend to closely track income growth over the long term. In other words, people largely spend what they earn,” noted Scott Anderson, chief economist of Bank of the West.

That said, it’s not just wages that are growing — employment also is rising, as are the hours that employers give to workers. What’s called the payrolls index, which factors in employment, hours and pay, rose 5.4% in the 12 months ending October.

Signs of somewhat softer spending could emerge this week in the tally for U.S. retail sales in October. Brisk demand for new cars and trucks and higher gas prices might goose the headline number, but underlying sales are not expected to look quite as robust if autos and fuel are excluded.

What does Jay Powell, the chairman of the Federal Reserve, think about all this? Investors will sift for clues on Wednesday when Powell outlines his views on the U.S. and global economy at a forum at the Dallas Federal Reserve.

Powell has pursued a gradualist approach to raising interest rates, a approach so far supported by steady economic growth and stable inflation.


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