Wholesale inflation across the Atlantic threatens Fed's rate-cutting policy

WHOLESALE inflation in America surged in July, leaving US prices for the past year rising at the fastest pace in 27 years, data released yesterday showed, writes Victoria Thomson.

According to the US labour department, wholesale prices shot up 1.2 per cent last month, pushed higher by rising costs for energy, motor vehicles and other products.

The increase was more than twice the 0.5 per cent gain that economists expected.

Core prices, which exclude food and energy, rose 0.7 per cent. That increase was the largest since November 2006 and more than triple the 0.2 per cent rise in core prices that had been expected.

In other American economic news, the US commerce department also reported that housing construction fell in July to the lowest pace in more than 17 years.

Builders broke ground on 965,000 housing units at a seasonally adjusted annual rate last month – the weakest showing since March 1991 – as the housing industry continues to struggle with falling sales and further rises in mortgage foreclosures.

The bad news on wholesale prices followed a report last week that US consumer prices shot up by 0.8 per cent in July, leaving consumer inflation rising at the fastest pace in 27 years.

The July price pressures reflected in part the big surge in energy costs during the month that pushed crude oil prices to a record of $147.27 per barrel and sent US petrol pump prices to an all-time high of $4.11 per gallon.

Crude oil prices have fallen by more than $30 per barrel since then, raising hopes that the surge in inflation will soon abate.

However, the price spikes in a number of areas seen in July raised concerns that the prolonged surge in energy prices was beginning to show up more broadly throughout the economy.

Such a development would put the Federal Reserve in a severe bind.

The US central bank would like to keep interest rates low to give a boost to the badly lagging economy, but Fed officials may feel pressured to start raising rates in an effort to make sure inflation does not get out of control.