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Wholesale prices jump up 1%

January inflation hits 25-year high

A surge in the prices of energy, food, and prescription drugs propelled a 1 percent rise in the producer price index last month. A surge in the prices of energy, food, and prescription drugs propelled a 1 percent rise in the producer price index last month. (Paul Sakuma/Associated Press)
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Associated Press / February 27, 2008

WASHINGTON - In more bad economic news, consumer confidence and home prices posted sharp declines while higher costs for such basics as food and energy left wholesale inflation rising at the fastest pace in a quarter-century.

The reports yesterday raised the threat of a return of "stagflation," the economic curse of the 1970s in which economic growth stagnates at the same time that inflation races ahead.

The 1 percent January jump in wholesale prices was led by a surge in the prices of energy, food, and prescription drugs and followed a report last week that consumer prices had risen by a bigger-than-expected 0.4 percent because of price pressures in the same areas.

Over the past 12 months, wholesale prices rose 7.4 percent, the largest yearover-year gain since late 1981. Analysts warned consumers to brace for more bad inflation news with crude oil prices rising to records above $100 per barrel and with more evidence that the prolonged jump in energy prices is starting to break out into more widespread price problems.

Meanwhile, the New York-based Conference Board reported its confidence index fell to 75.0 in February, down from a revised January reading of 87.3. The drop was far below what analysts had forecast and put the index at its lowest level since February 2003, a period that reflected anxiety in the run-up to the Iraq war.

A third report showed home prices, measured by the S&P/Case-Shiller index, dropped 8.9 percent in the fourth quarter of last year, compared to the same period in 2006, the steepest decline in the 20-year history of the index.

"Home prices across the nation and in most metro areas are significantly lower than where they were a year ago," said Yale University professor Robert Shiller, one of the index's creators. "Wherever you look, things look bleak."

Analysts said rising inflation, slumping home prices, a roiled stock market, and an economy flirting with a recession all combined to rattle consumers' nerves.

"There is no evidence that the recent collapse in consumer confidence is going to turn around any time soon," said Brian Bethune, senior economist at Global Insight. He said the drop in confidence will lead to a cutback in consumer spending that will trigger a brief recession in the first half of this year. And he cautioned that "severe negative dynamics" at present could make the forecast of a mild recession too optimistic.

However, Wall Street was able to shake off the spate of bad economic news yesterday, focusing instead on a statement by IBM of a $15 billion stock buyback program designed to boost its 2008 earnings. The Dow Jones industrial average rose 114.70 points to 12,684.92.

Private economists predicted further declines in housing prices in the months ahead as the two-year housing slump continues with no signs of a turnaround. The demand for homes is being constrained by tighter lending standards imposed by financial institutions suffering multibillion-dollar losses from soaring mortgage foreclosures. Those foreclosures are dumping more homes back onto an already glutted market.

RealtyTrac Inc., based in Irvine, Calif., reported the number of homes facing foreclosure climbed 57 percent in January from the previous year and more lenders are being forced to take possession of homes they can't unload at auctions.

The Bush administration insisted that the recently passed $168 billion economic stimulus bill, which will provide rebate checks to millions of families and tax breaks to encourage business investment, should stabilize the economy.

White House press secretary Dana Perino said President Bush had been briefed on all the economic figures released yesterday and was closely following developments. "We're in a softening period," she said. "And the question is, how soft is it going to be and how steep is the downturn going to be?"

Federal Reserve chairman Ben Bernanke is scheduled to deliver the central bank's twice-a-year economic report to Congress today, testimony that will be closely followed to see whether the uptick in inflation will divert the Fed from what became in January an aggressive rate-cutting campaign to combat a possible recession.

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