Inflation fears spark another Wall Street tumble

Wall Street fell sharply for a second straight session today after a hefty jump in wholesale inflation and a drop in new home construction gave investors more reason to believe an economic recovery is far off.

The Dow Jones industrial average dropped 130 points.

The Labour Department said its Producer Price Index rose by 1.2% in July, more than double the expected rate, and lifting the current annual rate to the loftiest level in 27 years.

Even after stripping out food and energy, core prices rose by a higher-than-expected 0.7%, the biggest increase since November 2006.

“Maybe investors were hoping to shrug off the challenges of high commodity prices and inflation,” said Jack Ablin, chief investment officer at Harris Private Bank. “But now we find out that perhaps the inflation situation is worse than we thought.”

A rebound in oil prices added to investors’ anxiety, which had abated slightly in recent weeks as crude tumbled from its July record above 147 a barrel to three-month lows. That retreat has helped to drive the Dow back above 11,000 after it sank below that level in mid-July.

But aside from August’s commodities drop, there have been few bright spots on Wall Street this summer; the banks are forecasting more losses, the credit markets are still tight, the housing market remains in a slump, and the economy continues to lose jobs.

The Commerce Department added to the heap of downbeat news today, reporting that July housing starts fell to an annual rate of 965,000 units – higher than analysts predicted, but the lowest level in more than 17 years nonetheless.

And the financial sector took another hit after a JPMorgan Chase & Co analyst estimated that Lehman Brothers Holding Inc. will have to write down its investments during the third quarter by 4 billion, and a Goldman Sachs analyst advised against buying the stock of American International Group.

With the US financial institutions low on available cash due to their poor investments in the mortgage markets, consumers and businesses are having a harder time getting loans – another hindrance for the economy.

According to preliminary calculations, the Dow fell 130.84, or 1.14%, to 11,348.55, after losing 180 points yesterday. It was the worst two-day performance for the blue-chip index since late June.

Broader stock indicators also declined. The Standard & Poor’s 500 index fell 11.90, or 0.93%, to 1,266.70, and the Nasdaq composite index fell 32.62, or 1.35%, to 2,384.36.