Coming Week: All About Consumers

The specter of inflation may be lurking on the horizon for U.S. markets once again.

Investors will be focused on the prospects for recession, recovery and more rate cuts this week, but price increases might be coming back onto the radar screen amid dollar weakness, high commodity prices and a low-interest-rate environment.

The consumer-price index for January will be released on Wednesday of the holiday-shortened upcoming week, giving an updated window onto the cost increases being absorbed by Americans.

"If the CPI comes out and it's big, that could have an impact," says James Paulsen, chief investment strategist at Wells Capital Management. "The bond market is already struggling with growing evidence that there's inflation."

The Federal Reserve hasn't hesitated so far this year to cut its target interest rate. While that's generally good for stocks and makes borrowing cheaper, it can also stoke inflation. The weakness of the dollar adds pressure, particularly because it helps boost the price of commodities such as oil, metals and food, which are already surging amid strong global demand.

"It makes it more difficult for [the Fed] to keep cutting rates to boost growth when inflation keeps coming in on the high side," says Nigel Gault, chief U.S. economist at Global Insight.

"People are worried because the Fed has put inflation on the back burner," says Maryann Hurley, vice president at D.A. Davidson. Investors, particularly in fixed income, are "concerned that the aggressive Fed easing, coupled with high energy prices and rising food prices, will fuel inflation."

Still, many think that jitters about inflation aren't likely to attract serious attention for several months, as the economy works through severe weakness and possible recession.

"We probably get a relief rally that the economy is not dead, and then several months later, we start to think about wage pressures" and other inflationary factors, Paulsen says.

"The Fed is clearly de-emphasizing inflation and dollar concerns, and keeping people employed and us out of recession," adds Phil Orlando, chief equity market strategist at Federated Investors. "Food and energy prices are probably going to continue to rise, but not enough to derail the Fed from its appointed mission."

Orlando sees the Fed cutting rates another full percentage point, to 2%, by the end of June. Minutes from the Fed's last policy meeting will be released Wednesday, but may get less attention than usual because central bank officials have talked so much since the meeting about their thinking.

"I don't think there's going to be anything new that's going to be a bigger bombshell than their 75-basis-point intermeeting cut and 50-basis-point meeting cut" in January, Orlando posits.

Hurley agrees that the minutes are unlikely to contain much new information, but adds, "you never know, so market participants will be watching" for new items of interest.

In particular, she said, people will be "looking for anything that makes you think they're going to do an intermeeting cut."

Housing starts and building-permits data will also come out on Wednesday. Investors have long known that the sector is in decline, so bad numbers generally haven't shocked people so much in the past several months. But former Fed Chairman Alan Greenspan brought the space back into focus last week, when he said the economy will continue to have problems until the housing sector bottoms.

Another key event of the week ahead: Retail giant Wal-Mart(WMT Quote) reports earnings on Tuesday, and its outlook is likely to be even more of a focus than usual as investors try to gauge the strength of the economy. Recent data on consumer strength have been mixed, with a poor University of Michigan sentiment report released Friday.

1 What would best describe your stance heading into the coming week of trading? Bullish Bearish Neutral 2 Which of these sectors do you think is set to move up in the coming week? --Choose One--Aerospace and DefenseAirlinesAutomobilesBeverages and Food ProductsBiotechnologyCommercial BanksComputers and PeripheralsConsumer NondurablesEnergy Equipment & ServicesHMOs and HospitalsHomebuildingInsuranceIntegrated OilInternet, Software ServicesInvestment Bankers and BrokersMediaMultiline RetailPharmaceuticalsPrecious MetalsSemis, Semi EquipmentTelecom EquipmentTobacco and AlcoholWireless CommunicationsUtilities 3 Which of these sectors do you think is set to move down in the coming week? --Choose One--Aerospace and DefenseAirlinesAutomobilesBeverages and Food ProductsBiotechnologyCommercial BanksComputers and PeripheralsConsumer NondurablesEnergy Equipment & ServicesHMOs and HospitalsHomebuildingInsuranceIntegrated OilInternet, Software ServicesInvestment Bankers and BrokersMediaMultiline RetailPharmaceuticalsPrecious MetalsSemis, Semi EquipmentTelecom EquipmentTobacco and AlcoholWireless CommunicationsUtilities View the results without voting