Wholesale surge is highest since 1981

Food, fuel, vehicle costs put a damper on hopes for swift U.S. recovery

By Martin Crutsinger
Associated Press
Published: Wednesday, Aug. 20, 2008 12:14 a.m. MDT
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WASHINGTON — Wholesale inflation soared in July, leaving prices rising at the fastest pace in nearly three decades. While recent declines in oil and other commodity prices raise hopes inflation may have peaked, some economists worry about the widespread nature of the July price surge and caution it will take more time for that pressure to ease on Wall Street and Main Street.

The Labor Department reported Tuesday that wholesale prices shot up 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.

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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.

Wall Street tumbled on the gloomy economic news as investors worried the worst housing slump in decades 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.

The Dow Jones industrial average fell 130.84 points to close at 11,348.55 after losing 180 points on Monday. It was the worst two-day performance for the Dow 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. on Tuesday reported 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 per barrel since then, raising hopes that inflation pressures will soon ease.

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A sign on the windows announces the discount available on an unsold 2008 Mark LT pickup truck at a Lincoln-Mercury dealership in the south Denver suburb of Englewood, Colo.. The Labor Department reported that wholesale prices shot up 1.2 percent in July, pushed higher by rising costs for energy, motor vehicles and other products. (David Zalubowski, Associated Press)
David Zalubowski, Associated Press
A sign on the windows announces the discount available on an unsold 2008 Mark LT pickup truck at a Lincoln-Mercury dealership in the south Denver suburb of Englewood, Colo.. The Labor Department reported that wholesale prices shot up 1.2 percent in July, pushed higher by rising costs for energy, motor vehicles and other products.