Stocks Rebound Despite Big Jump In June Inflation

By Steven Mufson and David Cho
Washington Post Staff Writers
Thursday, July 17, 2008

Consumer prices surged 5 percent over the past year, the Labor Department said yesterday, as inflationary pressures spread ominously beyond energy and food to other parts of the economy.

The report said consumer prices jumped 1.1 percent in June, the second-biggest monthly increase since 1982, and heightened concerns that the U.S. economy may be facing its worst bout of stagflation -- a combination of rising prices and sluggish growth -- in almost three decades.

Despite the worrying report on consumer prices, U.S. stock markets rebounded yesterday, led by a torrid advance in financial shares after Wells Fargo, the nation's second-largest mortgage lender, beat earnings expectations and raised its dividend, a sign that the big firm is confident about weathering the credit crisis.

The Dow Jones industrial average rose 2.5 percent, posting its best one-day gain since April. The Standard & Poor's 500-stock index, a broader measure, also gained 2.5 percent.

The rally was also spurred by news from the oil market, where prices fell sharply for the second straight day on signs of a weak U.S. economy and an Energy Department report that U.S. commercial stocks of petroleum increased last week. Crude oil prices on the New York Mercantile Exchange have tumbled about $11 a barrel in two days, though they remain at a historically high $134.60 a barrel.

Economic policymakers yesterday continued to try to restore public confidence in the nation's financial system, which has been shaken by losses in the housing market and other credit woes. Treasury Secretary Henry M. Paulson Jr. went to Capitol Hill in an effort to mollify House Republicans concerned that the Bush administration's plan to prop up mortgage giants Fannie Mae and Freddie Mac could lead to a taxpayer bailout.

The rising inflation numbers will complicate the job of regulators, in particular the Federal Reserve, and ensure that the economy will remain at the center of political debate in this election year. Newly released minutes of the Fed's June meeting showed that some members had favored a boost in interest rates "very soon" to combat inflation. The latest figures could increase the pressure on the Fed to do so.

"The Fed is in a bind," said Mark Thomas, a University of Oregon economist. "If they raise interest rates, that might slow economic growth, which is already fragile, and if they lower rates or hold constant, there's a danger of inflation accelerating."

The 1.1 percent rise in prices in June was almost double May's rate and more than offset a slight increase in wages. The only bigger increase since 1982 was the 1.3 percent rise after Hurricane Katrina in September 2005, the Labor Department said.

Volatile food and energy costs were the biggest causes behind the accelerating rate of inflation. Energy costs have jumped about 30 percent on an annualized basis since the start of the year. Food prices have increased at an 8 percent annualized rate during the past three months.

Other prices were also up in June, indicating that high prices for oil and other commodities are working their way through the economy. Transportation costs were up 3.8 percent last month; rents and the cost of education and other services rose briskly, too. Overall, core inflation -- which excludes food and energy -- increased 0.3 percent in June, a substantial increase over the previous four months.

But investors, buoyed by the Wells Fargo news, brushed off the inflation report and streamed to buy up stocks that were at the lowest level in years.

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