Transcripts

Wholesale Numbers & Housing Starts Spark The Latest Wall Street Sell-Off

SUSIE GHARIB: More selling on Wall Street today following two discouraging reports on the economy: a big drop in housing starts and a big jump in wholesale inflation. First, that bigger than expected rise in inflation. The Labor Department reported that the producer price index rose 1.2 percent in July. Excluding food and fuel costs, wholesale prices rose 0.7 of one percent. But as Suzanne Pratt reports, most economists think those hot inflation pressures will begin to cool in the coming months.

SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: The latest data on wholesale inflation is alarming. A sampling of wholesale costs showed car prices revved up 1.4 percent in July; beef prices rose 7.4 percent, the biggest gain in nearly five years; and prices for soft drinks fizzed up 2.4 percent. In total, producers paid nearly 10 percent more for goods in July this year than in July of '07 and it was the highest annual increase in the producer price index since 1981. Economists like Jerry Webman are quick to point out the July data do not reflect the recent huge drop in oil or commodity prices.

JERRY WEBMAN, CHIEF ECONOMIST, OPPENHEIMER FUNDS: These are backward looking numbers and we need to be cautious about overreacting. And the market's not overreacting to them, but there are some price pressures in the pipeline.

PRATT: Those pressures are evident in the annual core PPI, which excludes food and energy. It jumped 3.5 percent from a year ago, the biggest increase since 1991. Still, UBS economist Jim O'Sullivan expects inflationary pressures to ease in the coming months as the economy slows.

JAMES O'SULLIVAN, SR. U.S. ECONOMIST, UBS: Clearly, headline inflation is going to slow because of the drop in oil, but even the core numbers are likely to slow. Core inflation tends to lag growth. Unemployment is rising, slack is increasing and historically that has been the recipe for slowing inflation. And I don't expect this time to be any different.

PRATT: If inflation does cool off, experts say it means less pressure on the Federal Reserve to raise interest rates.

WEBMAN: The Fed is not going to be changing interest rates in the near future, probably not before the end of the year. It's been our opinion all year that they'd be on hold throughout 2008. I'm not surprised to see that they are still there.

PRATT: Economists say the Fed is also focused on the fragile state of financial markets. So even though price pressures are worrisome, some believe the credit crisis currently outranks inflation. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.