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Wholesale Prices Rising Quickly

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By MARTIN CRUTSINGER

The Associated Press

Published: August 20, 2008

WASHINGTON - Wholesale inflation surged in July, leaving prices for the past year rising at the fastest pace in 27 years, according to government data released Tuesday.

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. The increase was more than twice the 0.5 percent gain that economists expected.

Core prices, which exclude food and energy, rose 0.7 percent.

That increase was the biggest since November 2006 and more than triple the 0.2 percent rise in core prices that had been expected.

In other economic news, the Commerce Department reported that housing construction fell in July to the lowest pace in more than 17 years. Builders broke ground on 965,000 housing units at a seasonally adjusted annual rate last month - the weakest showing since March 1991 - as the housing industry continues to struggle with falling sales and rising mortgage foreclosures.

The bad news on wholesale prices followed a report last week that consumer prices shot up 0.8 percent in July, leaving consumer inflation rising at the fastest pace since 1991.

July's price pressures reflected in part the big surge in energy costs during the month that pushed crude oil prices to a record $147.27 per barrel and sent gasoline pump prices to a high of $4.11 per gallon.
Crude oil prices have fallen more than $30 per barrel since then, raising hopes that the surge in inflation will soon abate.

However, the price spikes in a number of areas seen in July raised concerns that the prolonged surge in energy prices was beginning to show up more broadly throughout the economy.

Sal Guatieri, an economist at BMO Capital Markets, said he thinks inflation at the consumer and wholesale levels will remain high for another month or so but then start to decline, reflecting the large decreases seen in crude oil and other commodities.

"A firmer dollar, retreating commodity prices and continued economic weakness should damp inflation by the fall," he said.

Such a development would put the Federal Reserve in a severe bind. The central bank would like to keep interest rates low to give a boost to the badly lagging economy, but Fed officials may feel pressured to start raising rates in an effort to make sure inflation does not get out of control.

For July, wholesale energy prices jumped 3.1 percent after a 6 percent gain in June. That increase reflected big jumps in the price of natural gas, home heating oil and liquefied petroleum gas, which offset a 0.2 percent dip in gasoline costs.

Food prices rose 0.3 percent in July after a 1.5 percent surge in June. Beef prices jumped 7.4 percent, the biggest increase in nearly four years.

Milk prices shot up 5 percent, the biggest gain in a year, and soft drink prices rose 2.4 percent, the largest increase in four years.

Excluding energy and food, the 0.7 percent rise in core inflation reflected big gains in the prices of passenger cars and light trucks, pharmaceutical preparations, and plastic products.

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