(AP) Oil prices fell substantially last week, yet the stock market dropped to its lowest levels since early July. People who are used to seeing stocks rise as oil prices fall could very well wonder what happened. Richard Fisher happened.

Fisher is the president of the Dallas Federal Reserve Bank and, as such, sits on the Federal Reserve's committee that sets interest rate policy. In two speeches last week, Fisher said inflation was rising near the high end of the Fed's tolerance level. Inflation, of course, is bad for the economy because consumers would have to pay higher prices for goods and services and would thus consume less.

The Fed's chief weapon against inflation is interest rates. By raising the nation's benchmark rate, the Fed makes it more expensive for corporations and individuals to borrow money. Business can't fund expansion as cheaply, and consumers pay more on their credit cards and variable rate mortgages. Prices remain stable, but the economy slows and corporate earnings shrink, making stocks less valuable.

Given the choice between runaway inflation and slowing the economy, the Fed will choose the latter, and it's a safe bet the central bank will continue raising rates through the end of the year. As a result, stocks headed south last week, with the Dow Jones industrial average falling 2.62 percent, the Standard & Poor's 500 dropping 2.68 percent and the Nasdaq composite average losing 2.84 percent.

Faced with higher interest rates and consumers paying more for gas and heating bills, stocks will be hard-pressed to make up the losses this week. Strong corporate earnings and reassuring forecasts for the fourth quarter would help, but investors will look to the government's economic data in hopes that, in the end, it won't be as bad as they fear.

ECONOMIC DATA

The nation's key inflation report, the Labor Department's consumer price index, is due Friday. CPI for September is expected to rise 0.9 percent, up from an 0.5 percent increase in August. Core CPI, with energy and food prices removed, is expected to climb 0.2 percent versus August's 0.1 percent increase.

Obviously, higher-than-expected CPI figures won't help Wall Street recover from the past week, but lower numbers could spark a rally as investors anticipate the Fed backing off on rates.

The other key piece of the economic equation, the consumer, also will see scrutiny on Friday as the University of Michigan's widely watched consumer sentiment index is released. The preliminary reading for October is expected to rise to 80 from a reading of 76.9 last month, with economists and market watchers banking on slightly lower gasoline prices _ and perhaps short memories _ for a boost in sentiment.

Finally, the Commerce Department will release its aggregate report on September retail sales Thursday morning. Sales are expected to edge 0.2 percent higher in September, compared to a 2.1 percent drop in August. With volatile auto sales removed, sales growth is expected to drop to 0.6 percent in September from 1 percent the previous month, a troubling sign heading into the holiday shopping season.

EARNINGS

As has become Wall Street tradition, the quarterly earnings season starts Monday afternoon with the first Dow industrial to report, Alcoa Inc. The aluminum producer's stock has been hammered this year due to higher energy prices, and is down 34 percent from its 52-week high of $34.99 on Nov. 29, 2004. The company is expected to earn 29 cents per share in the third quarter, down from 34 cents per share a year ago. Alcoa closed Friday at $23.04.

Fellow Dow component General Electric Co., due to report earnings Friday morning, said last week it expects its earnings forecasts to hold firm _ a move meant to assuage Wall Street, though it did little to stem the market's decline. GE is expected to earn 44 cents per share, compared to 38 cents per share in the third quarter of 2004. The company's stock has suffered along with the industrial sector, falling 9.4 percent from its 52-week high of $37.75 on Dec. 14, 2004, to close Friday at $34.22.

Apple Computer Inc. is expected to continue riding high on the success of its iPod line of music players, updated late in the quarter with the super-thin iPod Nano. The continued innovation of the instantly iconic technology has nearly tripled Apple's share price from its 52-week low of $18.825 on Dec. 12, 2004. The company is expected to earn 36 cents per share, compared to 16 cents per share last year, when it announces third-quarter earnings after Tuesday's trading session. Apple closed at $51.30 Friday.

EVENTS

On Tuesday afternoon, during the trading session, the Federal Reserve is expected to release the minutes from the Fed's Sept. 20 meeting. The Fed raised the nation's benchmark rate by a quarter percentage point to 3.75 percent at that meeting, though for the first time, the vote was not unanimous. Investors will closely scrutinize the report for the Fed's take on inflation _ perhaps to see whether Fisher is speaking for his colleagues or just himself.