What Inflation Means For ...

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Tensions are spiking in the Middle East, and  so is the price of oil, which reached $77 per bbl. That's a record, and not a good one as far as motorists and investors are concerned. Nor is it happy news for inflation, which is already at a 16-year high largely because of surging fuel costs. Consumer prices of all stripes rose at an annualized rate of 5.2% in May--enough to take some of the fun out of shopping. But Ben Bernanke, Chairman of the Federal Reserve, is on the case. The Fed raised its benchmark interest rate by a quarter point last month, the 17th straight increase, in its efforts to gently brake the economy by reining in spending. Retail sales fell ever so slightly in June, according to a Commerce Department report, but consumers hoarding money just to pay for gas won't help the inflation fight. The real test will come this week when the government announces how much consumer prices rose in June. Also keep an eye out for Bernanke's testimony before Congress on Wednesday. Here's why you should care about what he has to say... ...YOUR WALLET

While tame compared with the double-digit rises of the 1970s, oil prices are again the driving force behind inflation, with energy costs rising 31% at an annual rate so far in 2006. That ripples through the rest of the economy, showing up as fuel surcharges on services like airline tickets (up 7.9% so far this year) and higher prices on pretty much anything that travels before reaching a store. Even clothing has been inching up after months of deep discounting. "I wouldn't expect a lot of relief on gasoline prices," says Richard Berner, chief U.S. economist at Morgan Stanley. In addition to geopolitical tension, the hurricane season and its potential to disrupt refineries on the Gulf of Mexico lie ahead. And as we grudgingly get used to $3-per-gal. gasoline--it's been nearly two years since crude oil broke $50 a barrel--companies feel more comfortable passing along their own higher costs to customers.

...YOUR STOCKS Oil, war and stocks don't mix. When consumers get pinched by higher prices and pay more to borrow, investors are worried that they'll have less to spend, thus lowering overall demand for goods and services. That's already begun to happen. After growing 5.6% in the first three months of the year, the economy is expected to expand only 3% the rest of the year. Thatand the uncertainty created by the Middle East fightinghas helped batter the stock market; the S&P 500 is down 5% since early May. And rates are rising overseas as well. "It's not just the Federal Reserve," says Chris Burdick, director of economic analysis at Charles Schwab. "It's central banks across the globe." Until the Fed gives clear signals that it will stop the cycle of rate hikes--Bernanke took a wait-and-see attitude last month--expect volatile times for stocks.