Producer Prices Up 1.2% In July

By Howard Schneider and Heather Landy
Washington Post Staff Writers
Wednesday, August 20, 2008

Wholesale prices jumped in July at the fastest rate in more than a quarter-century, the Labor Department reported yesterday, furthering concerns about a continued increase in inflation at a time when economic activity has ebbed.

Stocks tumbled, with the Dow Jones industrial average posting its second straight triple-digit decline as the new government data suggested that an economic recovery may take longer than investors had expected.

"The economy faces more tough times ahead, which is uncomfortable for workers, businesses and investors," said Stuart Schweitzer, global markets strategist at J.P. Morgan Private Bank. "But we're only going to have room to grow once inflation is contained, and unfortunately the slowdown we're in is what appears to be needed right now to keep inflation in check."

Labor Department data showed that the cost of materials used by businesses increased 1.2 percent in July and has risen 9.8 percent in the past 12 months. It was the largest yearly increase since 1981, as businesses absorbed sharp cost increases for energy and other commodities.

The report followed recent news that consumer prices also are rising faster than expected -- and faster than the Federal Reserve's generally accepted target rate of around 2 percent. Although wholesale inflation does not necessarily translate into higher consumer prices, it can be indicative of things to come.

So far, however, the Fed has not reacted to inflation reports by raising interest rates, out of concern that higher borrowing costs would further slow the economy. With oil prices in particular falling from recent record highs, some hope upcoming reports will show price increases slowing.

Other government data released yesterday brought more bad news for the housing industry. Housing starts in July fell 11 percent compared with the month before, and housing permits -- a gauge of future construction activity -- dropped 18 percent.

The slump in the housing industry has taken an economy-wide toll, depressing earnings at such companies as Home Depot, which yesterday reported a 24 percent drop in profit for the past three months. The downturn has also upended the budgets of homeowners who had banked on the equity from increasing home values.

Rising mortgage default rates, meanwhile, have caused a crisis among banks and financial institutions and prompted a series of steps by the federal government to keep the credit markets functioning.

Financial stocks were among the biggest decliners yesterday. SLM Corp., the student loan company known as Sallie Mae, dropped 16 percent, or $2.47, to close at $13.

Lehman Brothers fell 13 percent, or $1.96, to $13.07, on concern that continued turmoil in the mortgage market will lead to more write-downs this quarter, and on growing speculation that the firm will sell its investment-management division, a stable source of income, to shore up its balance sheet.

Shares of Bank of America, American Express, J.P. Morgan Chase and Citigroup also ended the session lower.

The Dow Jones industrial average shed 1.14 percent, or 130.84, closing at 11,348.55. The broader Standard & Poor's 500-stock index fell 0.93 percent, or 11.91, to 1266.69.

Landy reported from New York.

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