Inflation still climbing

Inflation kept on its steady march in July, pulled along by higher gasoline and other energy prices.

In Utah, Wells Fargo reported that the cost of living rose by a nonseasonally adjusted 0.6 percent in July. It was the eighth increase in as many months and comes on the back of June's 0.4 percent increase.

Utah's increase surpassed the rise in the national Consumer Price Index for July, as reported by the U.S. Labor Department on Wednesday. The CPI rose by a seasonally-adjusted 0.4 percent last month, double the increase reported in June. However, the core inflation rate, which excludes the volatile food and energy sectors, slowed in July, rising by 0.2 percent after four straight months of 0.3 percent gains.

Energy and housing cost increases led the Utah index, rising 2.2 percent and 1.2 percent, respectively. On the national side, transportation costs ruled the day, jumping 2.9 percent last month, the biggest increase in three months.

Kelly K. Matthews, executive vice president and economist at Wells Fargo, said various economic indicators this week presented a complex, sometimes contradictory picture of the economy.

On Tuesday, AAA Utah reported that the average price of a gallon of unleaded regular gasoline in the state increased 11 cents during the past month, to $2.98 per gallon. Earlier in the day, the Labor Department released its report stating core inflation at the wholesale level dropped 0.3 percent.

That data combined with the Federal Reserve's decision last week to take a breather from further interest rate increases, Wednesday's inflation information and downward movement in the bond markets to generate some buzz, Matthews said.

"Not only is this an important aspect in relation to housing mortgage rates, but if there is a big inflationary worry out there, the two things we'd traditionally look at as indicating that we've got this big problem would be if long-term interest rates were going up and the value of the dollar were coming down," Matthews said. "While the dollar has been sort of flat-ish, the fact that long- term interest rates are declining is, to me, a fairly important factor in the market's interpretation that this just isn't a big inflationary worry."

Moreover, crude oil prices haven't spiked, nor have supplies been unduly taxed by BP's recent announcement regarding its Alaska oil field. Also, the fragile cessation in hostilities between Israel and Lebanon seems to be holding, easing concerns about supply or production interruptions in the region.

All of which has contributed to excitement on Wall Street, according to Sterling K. Jenson, regional managing director for Wells Capital Management in Salt Lake City.

On Wednesday, the Dow Jones industrial average rose 96.86, or 0.86 percent, to 11,327.12, its best close since May 16. The Dow has gone up nearly 229 points in two days. The Standard & Poor's 500 index added 9.85, or 0.77 percent, to 1,295.43, its highest level since May 11, and the Nasdaq composite index gained 34.53, or 1.63 percent, to 2,149.54 for its best close since July 6.

Jenson praised the "resiliency" of the stock market year-to-date and said Fed Chairman Ben Bernanke's recent statements before the U.S. Senate marked "a turning event for the stock market in its psychology."

"That was when he started to signal that perhaps the Fed would moderate its response to interest rate hikes, and that came through last week," Jenson said. "That was a sea-change from two years of relentless rate increases."

Analysts are now looking at whether the Fed can engineer rates such that there will be a slowdown in economic activity that will moderate inflation yet not impact corporate earnings substantially enough to curb 12 quarters of double-digit earnings growth.

"It's our suggestion right now that we think that the economy is going to continue to remain relatively strong . . . and that corporate earnings will continue to be relatively strong," Jenson said.

Even if, as some predict, the Fed makes one more interest rate increase by year's end, Jenson said he believed the market would hold.

"The economy, while cooling off, is not cooling off quickly enough to lower inflation pressures and satisfy the Fed," said David Wyss, chief economist at Standard & Poor's in New York, who predicted one more rate hike.

Jenson maintained: "Another rate hike will not deter this market."

Wells Capital believes that the equity markets "remain undervalued, and are becoming more and more undervalued" as time goes on, Jenson said. As such, Jenson said that it wouldn't be out of the realm of possibility that -- given renewed optimism on Wall Street, and absent extraordinary geopolitical strife -- the markets could see a bounce in the next year.

"Usually, historically, when the Fed pauses (in making interest rate increases), the stock market enters a very good cycle," Jenson said. "We see the beginning of that cycle now. It doesn't mean that it's going to happen in the next month or two months. But I think over the course of the next year, the potential for the market to rise 20 percent is not at all out of the expectation of what should happen."