Inflation soars at pace unseen since early ’80s
Posted on Wednesday, August 20, 2008
WASHINGTON — Wholesale inflation soared in July, despite a drop in crude oil, leaving prices rising at the fastest pace in nearly three decades.
The 1. 2 percent rise in wholesale prices, reported on Tuesday by the Labor Department, was well above economists’ expectations, and it could cause Federal Reserve policymakers to consider raising interest rates by the end of the year. The index climbed 1. 8 percent in June.
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 recessionary period when the Federal Reserve was driving interest rates to the highest levels since the Civil War to combat a decadelong bout of inflation.
Outside of food and fuel, businesses paid 0. 7 percent more for so-called core goods, especially automobile parts, industrial equipment and prescription drugs.
In another economic report, the Commerce Department reported Tuesday that construction of new homes and apart- ments slid in July to 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 Tuesday morning reports appeared to depress investors, and the Dow Jones industrial average opened slightly lower. It ended the day down 130. 84, or 1. 14 percent, at 11, 348. 55, after losing 180 points Monday. It was the worst two-day loss for the bluechip index since late June.
The Producer Price Index is considered a glimpse at what Americans may be forced to soon pay for consumer goods. Businesses that face higher costs along the production chain are likely to pass those costs on to customers.
The report presented the specter that consumer prices could rise higher in the months ahead. Inflation reached a 17-year high last month, according to the Consumer Price Index.
Fed central bankers chose to hold interest rates steady at their past two policy-setting meetings. The bankers have said they are still concerned about risks to economic growth — like the housing slump and tight credit market — and that raising rates could further tamp down activity.
But higher rates are also used to combat high prices, and reports in the past two weeks have presented a decidedly dark view of the nation’s inflation situation. Bankers and investors are hoping that the recent slowdown in the rise of energy prices, especially the drop in oil, will help ease that. In July, energy prices for producers rose at half their pace from June.
But the price spikes seen elsewhere in July prompted concerns that the prolonged ascent 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, 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.” Further up the production chain, intermediate goods rose 2. 7 percent last month, and crude goods rose 4. 2 percent. These data are more volatile from month to month.
In a separate report on Tuesday, the Commerce Department said that groundbreakings for homes fell in July as builders continued to cut back on residential construction projects in the face of the housing slump.
In June, data showed a big bump in permits for new homes and groundbreakings, which are referred to as “housing starts” by economists. That was a statistical anomaly stemming from a new set of zoning regulations in New York City, which led to a flurry of activity to start apartment projects.
In July, the data readjusted itself, to the tune of a 17. 7 percent decline in permits, which ran at a 937, 000 annual rate, and an 11 percent decline in starts, which fell to a 965, 000 annual rate. All data are seasonally adjusted.
A less distorted view of the market for housing development came from the single-family figures, which were not affected by the bump in Manhattan. In July, single-family permits fell 5. 2 percent, and starts fell 2. 9 percent.
Overall, the report presented more signs of stagnation in the housing sector, with builders more concerned about selling their existing inventory than starting new projects in an unwelcoming market.
Midwestern and Southern states saw more construction activity than those in the Northeast and West. Information in this article was contributed by Michael M. Grynbaum of The New York Times and Martin Crutsinger, Deb Riechmann, Jeannine Aversa and Christopher Rugaber of The Associated Press.
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