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With the near government shutdown averted in the eleventh hour last week, all eyes have now turned to the inflation-related data due out later this week, as well as the kickoff to March 2010 quarterly earnings results. As we have come to expect, Alcoa (NYSE:AA) will kick off earnings after the market close today, but the real meat in terms of earnings and economic data will not be felt until the second half of the week.

Oil Prices Continued to Climb; EIA Gas Expectations and Food Prices

As such, near term oil and its recent rise will once again be in the crosshairs as will goings-on in Libya and the rest of the Middle East. With oil crossing over $112 per barrel, investor concern over the ability of the consumer’s ability to continue to spend is likely to mount. Supporting this concern is the recent forecast offered by the U.S. Energy Information Administration that calls for gas to average $3.56 per gallon in 2011, up 28% over the 2010 average. Again, that is the average for all of 2011 and the same forecast expects gas prices for the peak-driving season, which ranges for April to September, to average $3.70 per gallon.

Turning to the other component of consumer-facing inflation -- food prices -- last week The United Nations' Food and Agriculture Organization (FAO) published its monthly Food Price Index, which measures price changes for a basket of cereals, oilseeds, dairy, meat and sugar. While the FAO found the index dipped modestly in March, that is off of record highs. As background, the FAO’s Food Price Index hit a record high in February for a second straight month, passing peaks seen in 2008. Despite the March dip, strong demand for grains and vegetable oils from biofuels industry is also seen by FAO as a driving force for food price rises, despite expected increases in planted areas this year.

While many will try to determine if those forecasts are on the money, the key point to me is that directionally they mean consumers will be paying far more for gasoline and food this year than last. With inflation-adjusted wage growth negative in February, and the likelihood that high unemployment will restrain meaningful wage growth at least near term, consumers are likely to be more selective in their spending or are more comfortable taking debt back on to their personal balance sheets. In my view, neither of those are good for sustaining the burgeoning economic recovery.

Key Economic Data This Week

Needless to say, economic releases mid-week – Retail Sales (Wednesday), the Producer Price Index (PPI, Thursday) and Consumer Price Index (CPI, Friday) will be watched closely to gauge to what degree the run-up in input costs is being felt. In my view, the overall PPI data will be the one to watch, in part because it includes food and energy prices but also because of the sharp jump reported in the data February (up 1.6%). With a number of companies in recent weeks announcing price increases -- FedEx (NYSE:FDX) and UPS (NYSE:UPS), Starbucks (NASDAQ:SBUX), Nike (NYSE:NKE), Polo Ralph Lauren (NYSE:RL), The Hershey Company (NYSE:HSY), Cheesecake Factory (NASDAQ:CAKE), Applebee's (NYSE:DIN) and Red Robin Gourmet Burgers (NASDAQ:RRGB), to name a few – it's only a matter of time before consumers feel the ripple effect of rising input costs.

It’s not just larger companies that are feeling the squeeze from inflationary pressure and raising prices. In February, according to a survey of small-business owners by the National Federation of Independent Business (NFIB), 5 percent more of them raised prices than cut them. The big increases came in wholesale and manufacturing, up about 10 percent, and agriculture, up more than 4 percent. Financial and insurance sector companies are also raising prices. But professional services firms, which include doctors and lawyers, still have more firms cutting prices than raising them. The NFIB will release its finding for March later this week.

I would argue that even if Wednesday’s Retail Sales numbers are better than the expected 0.6% headline for March (+0.8% excluding autos), investors will be eyeing both the CPI and PPI more heavily as an indicator of future spending. Current expectations call for headline PPI (which includes energy and food prices) to be up 0.8% in March compared to up 1.6% in February.

The last piece of notable economic data this week is the University of Michigan Consumer Sentiment Index, which has two components: Expectations and current conditions. Both components weakened in March from February and the overall index is expected to dip to a reading of 66 in April from 67.5 in March. Given the steep falloff in the outlook component from March to 57.9 from 71.6 in February, which marked the tenth largest monthly decline ever recorded, a modest rebound is likely. Even so, I will be watching to see how those index components held up for the April reading as well as commentary surrounding the index to see if and how those components were affected by mounting inflationary pressures over the last several weeks.

Earnings This Week – Watch the Outlook

As I noted above, March 2010 quarterly earnings results commences this week as Alcoa reports after the market close today. Later in the week, we will be hearing from JP Morgan Chase (NYSE:JPM), Hasbro (NASDAQ:HAS), JB Hunt (NASDAQ:JBHT), Bank of America (NYSE:BAC), Google (NASDAQ:GOOG) and others. All in all, 11 companies in the S&P 500 will report their results this week. I and others will be sifting through these early reports to get a better handle on what we might expect as the velocity of earnings reports picks up next week.

While many will no doubt be focusing on whether or not a company hits the consensus expectations for the March quarter, I’ll be placing more emphasis on its outlook relative to consensus expectations to see what changes if any have been made to reflect inflationary pressures or supply chain constraints associated with Japan. On that last point, Ford (NYSE:F) and Toyota (NYSE:TM) announced they will temporarily be closing some plants and cutting hours because of a lack of parts. As we recently saw with Research in Motion (RIMM), while a company may deliver a nice quarter, the outlook can weigh on a company if it falls short of expectations.

Source: Watching Oil, Inflation and Earnings