Inflation gauge up 0.5% in June

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ASSOCIATED PRESS

Wholesale prices rose by 0.5 percent in June, spurred by a big jump in food prices and continuing increases in energy costs.

The bigger-than-expected rise, reported yesterday by the Labor Department, raised concern about potential further interest-rate increases.

With Middle East tensions, spiking oil prices and economic uncertainty enveloping the financial markets, investors and analysts were looking to Fed Chairman Ben S. Bernanke's testimony before Congress today for clear signals on interest rates.

Concern has permeated the markets that higher inflation will prompt further rate boosts by the central bank and contribute to a more severe economic slowdown.

"Overall, wholesale price inflation continues at a pace that makes the Federal Reserve uneasy, even as economic growth slows," said Peter Morici, a professor at the University of Maryland's business school. "If the Fed acts too vigorously to contain inflation, it risks a recession and stagflation."

Core inflation, excluding volatile food and energy prices, edged up just 0.2 percent in June, in line with market expectations.

The government also reported that wholesale food prices increased 1.4 percent last month, with prices for processed chickens soaring 12.1 percent and increases marked by eggs, fresh fruit and dairy products. Wholesale energy prices rose 0.7 percent.

For wholesale prices overall, analysts had been expecting an increase in June of 0.3 percent.

The 0.5 percent increase followed rises of 0.2 percent in May and 0.9 percent in April.

The National Association of Homebuilders compounded the market's concerns after reporting that its index of new-home sales slumped to its lowest level since December 1991, citing pressure from rising interest rates.

In addition to Mr. Bernanke's testimony, analysts were watching closely for a key inflation signpost, consumer prices for June, which will be released on Wednesday.

On Monday, the Fed reported that output at the nation's factories, mines and utilities jumped by a stronger-than-expected 0.8 percent last month after a gain of 0.1 percent in May. The report could stoke anxiety over inflation and prompt Fed policy-makers to raise interest rates next month, analysts said.

Economists generally believe that manufacturing will slow in coming months as overall economic growth slows.

The economy expanded at a brisk pace of 5.6 percent in the first three months of the year, but many analysts believe that will slow to around 3 percent in the April-June quarter, as consumers struggle with rising interest rates, soaring gasoline prices and cooling home sales.

The increase in production in June put U.S. industry operating at 82.4 percent of capacity, a six-year high, up from a May operating rate of 81.8 percent of capacity.

The Fed keeps a close watch on the operating rate to see if it is approaching levels where bottlenecks could develop and threaten to boost inflationary pressures.