Producer price inflation soars to 27-year high of 9.8% in US

Policymakers in the US could not have a more difficult dilemma. Producer prices, the costs that businesses have to pay for goods and which they are starting to pass on to consumers, soared to a 27-year high last month – at the same time as the construction of new homes, a powerful indicator of the health of the economy, slumped.

Producer price inflation was 1.2 per cent in July alone, more than double the level economists had predicted, meaning that the annual rate hit 9.8 per cent.

Nervous investors warned that producers would pass such rises on to the consumer, stoking inflation in the months ahead, even as the Federal Reserve has predicted that prices will cool.

The Fed has kept interest rates steady for the past three months, after having brought them down dramatically to deal with the effects of the credit crisis. The bond markets still signal that the next move in rates is likely to be up, as the Fed moves to squeeze inflation from the economy after the end of the year, but investors have been hopeful that the day could be put off to allow an economic recovery to flower under low interest rates. That hope dimmed a little with yesterday's figures.

"The Fed is stuck between a rock and a hard place, and it shows," said Marc Pado, US market strategist at Cantor Fitzgerald in San Francisco. "There's nothing good about it. Inflation is more systemic than they were leading us to believe in the past numbers and it will continue to show up in the consumer price index for months to come. The question is whether investors can shake it off knowing that the price of oil has come down."

Even excluding volatile oil and energy prices, the producer price index was up 3.5 per cent in July from a year ago, a 17-year record.

Meanwhile, new data showed continuing problems in the US housing market, whose switch from boom to bust triggered the credit crisis. Housing starts – that is, construction firms breaking ground on new homes – were also at the lowest level since 1991 last month. They decreased 11 per cent to a seasonally adjusted 965,000 annual rate, the Commerce Department said. That wiped out a rise in June, which had been an anomaly economists put down to a tax change in New York City.