Inflation Back on Radar

The Labor Department's PPI rose 1% in July, about twice the estimate.
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Updated from 9:18 a.m. EDT

Wholesale inflation was much stronger than economists expected in July, rising 1% as measured by the government's producer price index. Excluding food and energy prices, the PPI was up 0.4%.

Wall Street was expecting gains of 0.5% on the headline number and 0.1% on the core print. The rise in the core number was the strongest monthly gain since January.

The PPI, which followed an unchanged reading in June, was swollen by a 10.9% gain in gasoline prices, as well as higher automotive costs. On Tuesday, the government said the consumer price index for July rose 0.5% while the core CPI rose 0.1%.

Stock prices took a hit on the news before recovering. In recent trading, the

Dow Jones Industrial Average

was up 14 points to 10,527, while the

Nasdaq

gained 4 pionts to 2141.

Bonds remained lower, with the 10-year Treasury yield at 4.24%, up from 4.22%. (Bond yields move in the opposite direction of bond prices.)

"I don't know that this is going to have a longer-term effect, but it was certainly an uncomfortable number," said John Canavan, market analyst with Stone & McCarthy Research Associates. "It seems to run counter to more recent inflation data. Because of that, we need to see more confirmation over time before inflation fears get heightened."

Wednesday's PPI took the steam out of stocks and looked likely to continue Tuesday's downtrend, in which the

Dow

lost 120 points and the

Nasdaq

shed 30.

"Today's surprisingly high PPI figures may explain yesterday afternoon's market weakness," said Ken Tower, chief market strategist with CyberTrader. "The selloff yesterday was an accurate anticipation. Hopefully the bad number is already built into expectations."

The Labor Department report shows that surging energy prices are being felt most acutely at the wholesale level. In Tuesday's CPI, gasoline prices were up a more modest 6%. The gains reflect oil's steady 18-month appreciation to recent records above $66 a barrel.

Wholesale inflation is running at a 3.9% annual clip this year after rising 3.6% in 2004. For the 12 months ended in July, producer prices rose 4.6%, up from 3.6% in June.