WASHINGTON(Reuters) – Wholesale prices shot up in July at the fastestyear-on-year rate since 1981, while home builders cut back onconstruction as they worked through a glut of unsold homes, governmentdata showed on Tuesday.
The reports offered little solace to the U.S. Federal Reserve, whichis hoping that a slowing economy will cool inflation so that thecentral bank can hold off on raising interest rates.
The Labor Department’s Producer Price Index, which measures pricesat the factory door, climbed 1.2 percent after a 1.8 percent gain inJune. So-called core producer prices, which exclude food and energy,jumped 0.7 percent in July after a 0.2 percent June increase.
Economists polled by Reuters had expected producer prices to risejust 0.6 percent in July, and had forecast that core prices would be uponly 0.2 percent. A sharp decline in oil prices since mid-July led manyinvestors to conclude that inflation pressures were subsiding.
The steep jump in core prices rattled financial markets, drivingstock futures down. The dollar gained in value on the prospect ofhigher rates.
"There’s nothing good about it," said Marc Pado, U.S. marketstrategist at Cantor Fitzgerald & Co in San Francisco. "Inflationis more systemic than they were leading us to believe in the pastnumbers and it will continue to show up in the CPI number for months tocome. The question is whether or not investors can shake it off knowingthat the price of oil has come down.
"The Fed is stuck between a rock and a hard place, and it shows," he added.
Separately, the Commerce Department reported that U.S. home buildingprojects started in July fell 11 percent to the lowest annual rate inmore than 17 years, while building permits tumbled 17.7 percent.
The annual pace of housing starts at 965,000 was slightly above WallStreet’s expectations of 960,000, but it was the lowest since a 921,000unit rate in March 1991. In June, housing starts rose 10.4 percent,revised up from the previously reported 9.1 percent gain.
Building permits, an indicator of future construction, dropped to anannual rate of 937,000, well below the 970,000 analysts polled byReuters had forecast. It was the lowest level since March, when theywere 932,000, the Commerce Department said.
Single family homes, which constitute the bulk of new housing, wereespecially weak. The annual unit rate of 641,000 single family homesstarted in July was the lowest since January 1991, when they were604,000. Building permits were 584,000, the lowest since 523,000 inAugust 1982.
(Additional reporting by Herb Lash in New York; Writing by Emily Kaiser; Editing by Tom Hals)
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