Inflation fears send Dow to two-year low

The Dow Jones last night tumbled to its lowest level in two years, just a day after the Federal Reserve cut US interest rates by half a point.

The blue-chip index slid 233.76 points or 2.4 per cent to 9,487 at the close as stock markets haemorrhaged in the final hour of trade.

The technology heavy Nasdaq composite gave up 1.47 per cent, or 27.23 points, to close at 1,830.21 while the broader Standard & Poor's 500 slipped 20.49 points (1.79 per cent) to 1,122.13 as one trader likened the mood in the market to "an outbreak of heart-in-mouth".

The continued sell-off on Wall Street was spurred by a report that consumer spending had risen faster than expected in February, raising fears of inflation.

Already disappointed that the rate cut had not been more aggressive, investors reacted to the prospect that even a slight increase in inflation would discourage Federal Reserve chairman Mr Alan Greenspan from cutting rates further to stimulate share prices.

The fall leaves the Dow just 108.62 points above the level that would formally mark a bear market - a drop of 20 per cent from its high.

"There is a sign of `no place to hide' in the market and this is a gut-wrenching decline," said Merrill Lynch chief market analyst, Mr Dick McCabe, last night. "There's an air of pessimism. It's getting to the point of no hope," he said, adding that disappointment with the rate cut had combined with worry about earnings reports and the collapse of technology stocks to infect the old economy. A significant factor yesterday was Procter & Gamble, which upset the market with news of impending large-scale job cuts.

"There are people who think if only the Fed would cut rates enough, everything would be OK. But there may be more people coming to the conclusion that short rates are not really what the market's problem is," said Mr Jay Mueller, economist and portfolio manager at Strong Capital Management. "The problem is earnings. That's what we need to have turn around and it takes time," he said.

US consumer prices are rising at an annual rate of 5.6 per cent to date this year, compared with a 3.4 per cent increase for all of last year. The increase mostly reflects higher energy prices. Consumer inflation rose 0.3 per cent in February, and would have been higher had not the fall in energy products blunted rising costs for food and prescription drugs, which posted their biggest increase since mid1998. The advance in the Consumer Price Index, the US government's most closely watched inflation gauge, followed a 0.6 per cent jump in January.

"Traders wanted 75 basis points [cut] so they sold on the news," according to Mr Larry Wachtel, market analyst with Prudential Securities. "After the traders sold, investors stepped up to the plate to sell."

Some economists believe that, despite the inflationary trend, the Fed may cut rates before its next scheduled meeting in May, given continued economic weakness in the US and abroad. Merrill Lynch economist Mr Gerald Cohen said: "These data will not keep the Fed from easing. Right now, their main focus is slow growth and weak financial markets."