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Price surge raises fears
Wholesale increase of 1.2% in July was double the expected
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Published: August 20, 2008
WASHINGTON - Wholesale inflation soared in July, leaving prices rising at the fastest pace in nearly 30 years. While recent declines in oil and other commodity prices raise hopes that inflation may have peaked, some economists worry about the widespread nature of the July price surge and caution that it will take more time for that pressure to ease on Wall Street and Main Street.
The Labor Department reported yesterday that wholesale prices increased by 1.2 percent in July, pushed higher by rising costs for energy and a variety of other products from motor vehicles to plastic goods.
The increase was more than twice the 0.5 percent gain that economists expected and left prices rising over the past 12 months by 9.8 percent. That marked the biggest annual increase since the 12 months ending in June 1981, a period when the Federal Reserve was driving interest rates to the highest levels since the Civil War in an effort to combat a decade-long bout of inflation.
Core prices, which exclude food and energy, rose 0.7 percent last month. That increase was the biggest since November 2006 and more than triple the 0.2 percent rise in core prices that had been expected.
Elsewhere, the Commerce Department reported that construction of new homes and apartments slid to an annual rate of 965,000 units in July, a 17-year low. Builders continued to slash production as they battled slumping sales and soaring mortgage defaults, dumping more homes on an already glutted market.
The report showed the number of units started in the South declined by 8 percent from June to July.
Wall Street tumbled on the gloomy economic news as investors worried that the worst housing slump in years was showing no signs of a rebound and that the Federal Reserve's tool to combat the weakness -- lowering interest rates -- was unlikely to be used given the sharp jump in inflation seen last month in both wholesale and consumer prices.
According to preliminary calculations, the Dow fell 130.84, or 1.14 percent, to 11,348.55, after losing 180 points on Monday. It was the worst two-day performance for the blue-chip index since late June.
Last week, the government reported that consumer prices had jumped by 0.8 percent in July, leaving prices over the past 12 months rising at the fastest pace since 1991.
The steep slump in housing, rising unemployment and a severe credit crisis have worked to offset $92 billion in economic-stimulus payments made from April through July intended to keep the economy out of a deep recession. Retail giants Target Corp. and Home Depot Inc. reported yesterday that profits sank in the second quarter. Home Depot said it continued to have a downbeat outlook for the year as the housing market shows no signs of recovery.
The July price pressures reflected in part the surge in energy costs that pushed crude-oil and gasoline prices to record highs. Crude-oil prices have fallen by more than $30 a barrel since then, raising hopes that inflation pressures will ease.
But the price spikes seen elsewhere in July prompted concerns that the prolonged surge in energy was beginning to show up more broadly throughout the economy, and that while prices may rise quickly, they tend to come back down much more slowly.
"Inflation is way too hot," said Joel Naroff, the chief economist at Naroff Economic Advisors in Holland, Pa. "It took a long time for the surge in commodity prices to seep into the general economy so don't expect one month of commodity-price declines to suddenly turn off the inflation pump."
But other economists said they believe that the July inflation report could represent the worst for inflation pressures this year if -- and they concede this is a big if -- energy prices continue to decline.
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