Wholesale inflation surged in July

Economists saw a silver lining in the continued plunge in housing construction, saying it is needed to help reduce the glut of unsold homes as builders compete with foreclosed homes selling at steep price discounts.

In Crawford, Texas, where President Bush is vacationing, spokesman Tony Fratto said the big jump in July producer prices did not “reflect the recent significant fall in oil prices, which everyone would like to see continue.”

The Federal Reserve is caught between a slumping economy, as reflected by the further plunge in housing construction, and the big jump in inflation pressures, which has some Fed officials lobbying for the central bank to start boosting interest rates.

The Fed, which aggressively cut interest rates from last September through April, has held rates unchanged at meetings in June and earlier this month. Richard Fisher, president of the Fed’s Dallas regional bank, dissented at both those meetings, arguing the central bank should start raising interest rates to make sure the inflation surge does not become embedded in the economy.

“We cannot afford to gamble away our credibility,” Fisher said Tuesday in a speech in Colorado. He warned that the recent burst of inflation could threaten the economy as “a lingering inflationary fever.”

Rebecca Braeu, an economist at John Hancock in Boston, said that the big jump in core inflation in the wholesale price report would definitely set off alarm bells at the Fed. But she and other analysts said they did not believe the central bank will start raising rates, especially before the November election, as long as price pressures begin to moderate in upcoming reports.

For July, wholesale energy prices jumped by 3.1 percent following a 6 percent gain in June. That increase reflected big increases in the price of natural gas, home heating oil and liquefied petroleum gas, which offset a 0.2 percent dip in gasoline costs.

Food prices rose by 0.3 percent in July after a 1.5 percent surge in June. Beef prices jumped by 7.4 percent, the biggest increase in nearly four years. Milk prices shot up by 5 percent, the biggest gain in a year, while soft drink prices rose by 2.4 percent, the largest increase in four years.

Excluding energy and food, the 0.7 percent rise in core inflation reflected big gains in the prices of passenger cars and light trucks, pharmaceutical preparations and plastic products.

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