Inflation Jitters at Fever Pitch

But with surging commodity prices, low unemployment and strong corporate profits, such as from Citigroup (C Quote) and Eaton (ETN Quote) on Monday, and Merrill Lynch (MER Quote) and Johnson & Johnson (JNJ Quote) on Tuesday, it is not hard to imagine it'll keep going after rate hike No. 16 on May 10.

Moreover, liquidity is plentiful. RealMoney.com contributor Tony Crescenzi of Miller Tabak noted Thursday that in the first quarter, commercial-paper issuance reached its highest level in more than five years, at $1.712 trillion, up 17% last month from the year before. Commercial and industrial loans last week hit their highest level since May 2001, up 13% compared with a year ago, to $1.085 trillion. Bank credit also reached an all-time high last week, at $7.723 trillion, up 11% vs. one year ago. Finally, M2 increased at a 6.7% pace over the past three months, an acceleration when compared with the 4.7% pace over the past year, Crescenzi reported.

And money is still pouring in from overseas as well. Foreign investors are chomping up U.S. securities to the tune of $86.9 billion in February, as reported by the Treasury International Capital system. February inflows easily trumped the $65.7 billion trade deficit for the month, beat estimates of $61.4 billion and surpassed January's inflows of $69.1 billion.

Furthermore, inflation is not only on the mind of economists and investors.

After kicking off the first-quarter's earnings season with a home run last week, blue-chip aluminum producer Alcoa's (AA Quote) chief executive cautioned that, while the company doubled its profits compared with one year ago, it is still "fighting inflationary pressures." And aluminum prices could rise if Aloca employees strike next month when their master contract expires, The Wall Street Journal reports.

The stock market will almost certainly react to this week's inflation data, whether it proves better or worse than expectations. But inflationary pressures will likely hit stocks hardest later this year or early in 2007, when the impact of higher rates and higher prices forces the consumer to pull back on spending, says RealMoney.com contributor Barry Ritholtz, chief market strategist of Ritholtz Research and Analytics and president of Ritholtz Capital Partners, a New York-based hedge fund.

While signs of a consumer slowdown are scarce for now, Citigroup's otherwise strong first-quarter earnings report Monday showed cracks in the foundation. Citigroup reported a decline its global consumer lending, which includes its credit card business. In the U.S., its consumer segment declined 4%.