Inflation numbers due; Stocks fall, oil drops

WASHINGTON – Investors get another reading on inflation today, this time for consumers, and the Federal Reserve reports on industrial production. Meanwhile, Federal Reserve Chairman Ben Bernanke testifies for a second day before Congress amid a backdrop of fading confidence in the U.S. economy. Stocks are headed for a moderately lower open with Dow futures down 22, and oil prices extended their decline.

The U.S. economic downturn gained steam yesterday, with a report of the highest inflation since the early 1980s, more bad news for banks and automakers and a suggestion by the Federal Reserve chief that worse days are ahead.

The Labor Department releases the June Consumer Price Index at 8:30 a.m. EDT. Wholesale inflation, driven by skyrocketing gas and food costs, rose by 9.2 percent for the 12 months ending in June — the fastest pace since the summer of 1981, during another energy crunch.

At the same time, consumers hit the brakes hard despite a massive infusion of government stimulus checks. Retail sales turned in their poorest showing in four months.

Yesterday, Bernanke told Congress the fragile economy is facing “numerous difficulties” despite the Fed’s aggressive interest rate reductions and other fortifying steps.

Today’s decline in stock futures comes a day after Wall Street closed mostly lower and the Dow Jones industrial average logged its first close below 11,000 since July 2006.

By midday in Europe, light, sweet crude for August delivery was down S1.56 at $137.18 a barrel in electronic trading on the New York Mercantile Exchange.

President Bush sought to bolster confidence yesterday by declaring that the financial system was “basically sound,” but he conceded: “It’s been a difficult time for many American families.”

Bernanke delivered a somber midyear outlook to Congress, saying the U.S. faces “numerous difficulties” despite the Fed’s interest rate-cutting campaign, which began last September in hopes of preventing a recession.

Bernanke said the Fed expected the economy to grow for the rest of this year “appreciably below its trend rate.” He cautioned inflation was likely to move “temporarily higher” in the near future.

That puts the Fed in a bind: Rising inflation hamstrings the Fed from cutting interest rates to jump-start the economy. The Fed had already signaled last month the rate cuts were probably at an end.

Outside Washington, there was plenty more bad news. On Wall Street, the Dow Jones industrials closed below 11,000 for the first time in two years, and shares of troubled mortgage giants Fannie Mae and Freddie Mac tumbled again. Fannie shed 27.3 percent and Freddie lost 26 percent.

In Los Angeles, police had to order people lined up outside an IndyMac Bank branch to remain calm or face arrest as they tried to pull out their money on the second day of the failed institution’s federal takeover.

An analyst downgraded Wachovia Corp. and said the outlook for its shareholders is “bleak.” Its already-battered stock sank about 7.7 percent further, to $9.08. U.S. Bancorp posted an 18 percent drop in second-quarter profit and tripled its provision for credit losses.

General Motors said Tuesday it plans to lay off salaried workers, cut truck production and suspend its stock dividend, all in an effort to raise $15 billion to help turn around its North American operations.

The dollar hit a new low against the euro. And even good news came with a dark side: Oil prices fell by more than $6 per barrel — the biggest single-day drop in 17 years — as traders fretted that the slowing U.S. economy would dampen demand for crude.

“The country is in a bad spot right now, squeezed by high and accelerating inflation and a very weak economy and struggling to overcome a very severe financial shock,” said Mark Zandi, chief economist at Moody’s Economy.com.

Wholesale prices for goods before they reach consumers rose by 1.8 percent in June from a year earlier and at 9.2 percent for the 12 months ending in June. Core inflation, which excludes food and energy, was better behaved, rising by just 0.2 percent in June, slightly lower than expected.

Food costs were up 1.5 percent, the biggest increase since January, led by steep gains in the cost of vegetables and eggs. Even pet food jumped by 6 percent, the largest monthly increase on record.

Wholesale energy prices shot up 6 percent. The price of unleaded regular gas surged 9 percent in June on top of a similar increase in May. Home heating oil, natural gas and liquefied petroleum gas also took big jumps.

Retail sales were up just 0.1 percent in June, the worst showing since February. That figure reflected a huge drop in auto sales and would have been even worse had it not been for a big jump in gas sales — reflecting higher prices, not demand.

Analysts were particularly alarmed by the retail sales report because consumer spending accounts for two thirds of total economic growth. The weak sales came as the government was pumping out $28 billion in economic stimulus checks, bringing the total payments to $78 billion by the end of June.

Those same analysts worried what will happen after the government finishes mailing out the bulk of the checks this month.

“Clearly the economy is on the ropes with weak employment market conditions, declining home and equity prices and surging gasoline prices inducing the consumer to pull back,” said Brian Bethune, chief U.S. financial economist at Global Insight.

Despite tough talk on inflation from Bernanke, many analysts predicted that the Fed will keep interest rates unchanged for the rest of the year to give the financial system some breathing room to deal with a tidal wave of mortgage defaults. Those have already resulted in an estimated $400 billion in losses at financial institutions.

Treasury Secretary Henry Paulson, appearing with Bernanke before the Senate Banking Committee, came under a barrage of tough questions about an emergency plan to bolster Fannie and Freddie, which between them hold or guarantee more than $5 trillion in mortgage debt — nearly half of the nation’s mortgage debt.

The plan would have Congress authorize billions of dollars of government help should the two giant institutions come under increased pressure because of the surge in mortgage loan losses. As a last resort, the government could also invest directly in Fannie and Freddie.

But both Democrats and Republicans on the committee questioned why the administration was seeking what critics term a bailout for two big corporations, with taxpayers left holding the bag in the event of severe losses.

Paulson insisted taxpayers were being protected and said the offer of government help should be enough to calm jittery markets.

WASHINGTON (AP) — The economy showed the depth of its twin problems on Tuesday, slow growth and rising inflation, as the nation wrestled with a teetering financial system, a slumping dollar and rising prices for food and fuel.

The Labor Department reported that soaring costs for gasoline and food pushed inflation at the wholesale level up by a bigger-than-expected 1.8 percent in June, leaving inflation rising over the past year at the fastest pace in more than a quarter-century.

Over the past 12 months, wholesale prices are up 9.2 percent, the largest year-over-year surge since June 1981, another period when soaring energy costs were giving the country inflation pains.

Core inflation, which excludes energy and food, was better behaved in June, rising by just 0.2 percent, slightly lower than expectations.

A separate report from the Commerce Department showed that all the economy’s problems were weighing on the consumer. Retail sales edged up by a tiny 0.1 percent in June, weaker than had been expected, as consumer spending was held back by a sharp plunge in sales at auto dealerships.

The weak retail sales performance was a bad sign for future growth, given that it came in a month when the government was pumping out another $28 billion in economic stimulus payments, bringing the total payments to $78 billion at the end of June. Analysts said even this massive infusion of government support was not enough to overcome all the problems weighing on consumers.

“Clearly the economy is on the ropes with weak employment market conditions, declining home and equity prices and surging gasoline prices inducing the consumer to pull back,” said Brian Bethune, chief U.S. financial economist at Global Insight.

Wall Street ended a whipsaw day mostly lower as fears of instability in the financial sector kept investors on edge despite a steep retreat in oil prices. According to preliminary calculations, the Dow Jones industrial average fell 92.65 points to close at 10,962.54. It was the Dow’s lowest close since July 24, 2006.

Oil prices plunged — at times they dropped more than $10 a barrel from the day’s high — on concerns that the economic malaise in the U.S. would stifle demand for crude. It was third big sell-off in just over a week.

Federal Reserve Chairman Ben Bernanke said Tuesday that the fragile economy was being confronted by “numerous difficulties” including persistent strains in financial markets, rising joblessness and housing problems. He said rising prices for energy and food were elevating the risks of inflation.

Delivering his midyear economic report to the Congress, Bernanke said the current situation poses “significant challenges” for Fed policymakers as they try to chart the best course for keeping the economy growing, while making sure inflation doesn’t dangerously flare up.

The Fed signaled an end to an aggressive rate-cutting campaign in June because of growing concerns about inflation. Bernanke kept up his tough anti-inflation talk on Tuesday but stressed many other problems that could short circuit economic growth.

In a third economic report, the Commerce Department said business inventories rose at a slower-than-expected pace in May, a possible indication that the weakening economy is making companies cautious on their restocking plans.

The department said inventories held on shelves and backlots edged up 0.3 percent in May, smaller than the 0.5 percent gain that many economists had been expecting. It was the smallest monthly increase since inventories had risen just 0.2 percent in April.

Many economists are worried that a host of problems from a lengthy slump in housing to a severe credit crunch could push the country into a recession. But so far, the overall economy, as measured by the gross domestic product, has managed to stay in positive territory, helped in part by companies rebuilding their inventories.

For June, energy prices at the wholesale level shot up by 6 percent; the price of unleaded regular gasoline surged by 9 percent following an even bigger 9.6 percent increase in May.

The 0.1 percent rise in retail sales was even weaker than the 0.4 percent gain that analysts had been expecting.

That small rise reflected a 3.3 percent drop in sales at auto dealerships, offsetting a big 4.6 percent jump in sales at gasoline stations, an increase that largely mirrored last month’s huge jump in pump prices.

General Motors said Tuesday that it plans to lay off salaried workers, cut truck production and suspend its stock dividend, showing the depth of the U.S. auto industry’s mounting troubles as it adjusts to a declining U.S. market.

GM said it would also borrow $2 billion to $3 billion as part of an effort to raise $15 billion to help turn around its North American operations.