Inflation fears send US stocks plunging

Inflation fears sent stocks plunging in the United States today as jitters over high oil prices exacerbated signals that the Federal Reserve will keep lifting interest rates to contain price increases.

The Dow Jones industrial average sank nearly 200 points.

Fed Chairman Ben Bernanke told an international monetary conference that while rising energy costs have helped slow the pace of economic growth, core inflation - excluding energy and food – was near the central bank’s tolerance level and could warrant further rate tightening.

The news stunned investors who had grown hopeful that the Fed had almost finished raising rates after recent data showed signs that the economy was beginning to cool off.

But with Bernanke saying inflation still posed a problem, traders worried about higher interest rates in a slowing economy limiting the potential for stocks to make long-term gains.

“In reality, nothing’s really changed,” said Steve Neimeth, senior vice president and portfolio manager at AIG SunAmerica. “But now, Bernanke has finally said the consumer is weak and that inflation is at the high end of the Fed’s range. The market’s basically nervous that they’ve gotten a clear signal from him.”

Stocks were already under pressure from a jump in oil prices fuelled by Iran’s threat to cut oil exports if Western nations punish or attack the country over its nuclear arms program, unnerving a market already concerned that severe hurricanes could devastate Gulf Coast refineries again this summer.

The Dow plunged 199.15, or 1.77%, to 11,048.72.

Broader stock indicators also slumped. The Standard & Poor’s 500 index dropped 22.93, or 1.78%, to 1,265.29; the Nasdaq composite index fell 49.79, or 2.24%, to 2,169.62, falling into negative territory for 2006.

Bonds slipped after Bernanke’s speech increased the likelihood that the Fed will boost interest rates again at its June 28-29 meeting. The yield on the 10-year Treasury note rose to 5.02% from 5% late Friday.

Elsewhere, the US dollar recovered slightly against the Japanese yen and was flat versus European currencies. Gold prices returned to about 50dollars an ounce.

In economic news, the Institute for Supply Management said its services index for May dropped 2.9 points to 60.1, nearly in line with estimates for a reading of 60. However, the prices paid component surged 7 points to 77.5, stirring fears about inflation.

Although economists had predicted a dip in the ISM index, the slower growth added to concerns about whether the economy was slowing too quickly. On Friday, a sharply larger-than-forecast slide in monthly job growth deepened those fears.

But even as the economy shows signs of tapering, persistently high oil and gasoline prices are expected to put more strain on consumers as lending rates rise and home values stabilise – the combination of which is feared to trigger a downturn. Bernanke confirmed those concerns, saying economic growth is moderating but that inflation is still a threat.

Given the uncertainty about interest rates and inflation, consumer confidence readings later this month will be a critical aspect of the economic picture, said Scott Fullman, chief investment strategist for Hapoalim Securities USA.

“This concern over oil is really the driving force of the market,” Fullman said. “We’re coming into vacation season. (Energy prices) are going to play an awful lot on how consumers will be spending their money this summer.”

Oil-related stocks sold off earlier gains despite the boost in crude prices. Chevron Corp. dropped 1.40dollars to 59.35dollars, ConocoPhillips fell 1.97dollars to 62.54dollars and Dow Jones industrial Exxon Mobil Corp. fell 1.60dollars to 60.05dollars. Drilling services firm Halliburton Co. meanwhile declined 2.53dollars to 74.25dollars.

Harrah’s Entertainment Inc. stumbled after it last week lost a bid to build a new casino resort in Singapore to rival Las Vegas Sands Corp. Harrah’s fell 1.15dollars to 75.25dollars, and Las Vegas Sands slid 1.35dollars to 69.25dollars.

Declining issues outpaced advancers by almost 4 to 1 on the New York Stock Exchange, where volume of 1.63 billion shares trailed the 1.69 billion shares changing hands at the same point Friday.

The Russell 2000 index of smaller companies tumbled 23.53, or 3.19%, to 713.92.