Inflation Inches Up on Wholesale Level

Shoppers peruse a long line of unsold 2006 BMW 5-series and 3-series sedans on the lot of a BMW dealerhsip in the south Denver suburb of Littleton, Colo., on Saturday, Aug. 5, 2006. Shoppers got back in the buying mood in July, propelling sales at the nation's retailers up by 1.4 percent, the most in six months. The snapback reported by the Commerce Department on Friday came after shoppers had hunkered down in June, depressing retail sales by 0.4 percent, according to revised figures. (AP Photo/David Zalubowski) (David Zalubowski - AP)

WASHINGTON -- Falling food prices helped to keep inflation at the wholesale level contained in July. But a relentless rise in energy prices was expected to make the relief short-lived.

The Labor Department reported that wholesale prices increased a slight 0.1 percent in July, far below the 0.5 percent jump in June. The improvement reflected a retreat in food prices, which had surged by 1.4 percent in June only to decline by 0.3 percent in July.

Core wholesale inflation, which excludes energy and food, was also well-behaved in July, posting an unexpected decline of 0.3 percent, the first drop in nine months.

That development sent stock prices soaring as investors believed it could provide further support for those Federal Reserve officials arguing that inflation is beginning to slow as the economy slows.

The Dow Jones industrial average ended the day up 132.39 points to close at 11,230.26.

But private economists were not as convinced, noting that energy prices were up sharply and the decline in the core rate of inflation was heavily influenced by special factors, such as a weakness in light truck sales and continued declines in computer prices.

"The extreme reaction to a questionable number tells us that the investors are desperate for some good inflation news," said Joel Naroff, chief economist at Naroff Economic Advisors.

In other economic news Tuesday:

_Home sales fell in 28 states and the District of Columbia in the April-June quarter of this year, compared with the same period a year ago, according to a National Association of Realtors report that provided further evidence that the nation's five-year housing boom is over.

_A survey of sentiment among the nation's home builders dropped in August by seven points to a reading of 32, the lowest level in more than 15 years. It was the seventh consecutive monthly decline and was blamed on rising builder worries about record levels of unsold homes and increased cancellations of purchase contracts.

Federal Reserve policymakers broke a two-year string of interest rate increases last week, saying they believed that a slowing economy would help restrain inflation pressures.

But many private economists are worried that the continued rise in energy costs could force the Fed to resume rate increases in coming months.