Purchasing price rise sparks Wall St nerves

AN INCREASE in prices paid by purchasing managers in the US to a six-year high set the cat among the pigeons on Wall Street, writes Diane Coyle. The unexpected evidence of inflationary pressure took bond and equity prices lower.

In nervous trading in advance of the important employment report due out today and a long holiday weekend, the Dow Jones average was down 11.98 points to 3,901.44 by the close. Treasury bond yields edged up.

The price index published by the National Association of Purchasing Managers climbed to 74.5 in August from 73.1 in July. This was the highest level of the index - regarded as an advance indicator of inflation by the Federal Reserve Board - since August 1988.

Elias Bikhazi, financial markets analyst at Deutsche Bank Securities, said: 'The index has been tending higher and it reinforces the message from similar surveys. The figure reinforces the notion that the Federal Reserve may need to tighten policy still more.'

Although the NAPM's business activity index fell from 57.8 to 56.2, its measure of the number of managers experiencing slower deliveries rose, suggesting that there were more bottlenecks in the economy.

Separate figures on construction spending showed a bigger-than-expected increase of 0.6 per cent in July, with the June increase revised up to 0.3 per cent.

The surprise increase reported by the NAPM survey will redouble the attention paid to today's statistics on unemployment and earnings.

Wall Street is likely to react badly to an unemployment rate below 6 per cent, although analysts said the view would be clouded by the US baseball strike. This has increased joblessness among the support industry of ushers and vendors, and could make a mark on the unemployment total.