Inflation Skyrockets On Energy Costs
Consumer prices shot up in June at the second-fastest pace in 26 years with two-thirds of the surge blamed on soaring energy prices.
The Labor Department reported that consumer prices jumped 1.1 percent last month, much worse than had been expected. Energy prices rocketed upward by 6.6 percent, reflecting big gains for gasoline, home heating oil and natural gas.
The big rise in prices cut deeply into consumers' earning power with average weekly wages, after adjusting for inflation, dropping by 0.9 percent in June, the biggest monthly decline since 1984.
The 1.1 percent June price increase was the second largest monthly advance in the past 26 years, surpassed only by a 1.3 percent gain in September 2005 from a jolt to energy costs after Hurricane Katrina.
Separately, the Federal Reserve reported that industrial output rose 0.5 percent in June, the fastest pace in 11 months. The increase, the highest since a 0.6 percent gain in July of last year, reflected an end to an automotive production strike rather than any widespread strength in the economy.
The report on retail inflation followed similarly grim news on Tuesday that wholesale prices had shot up by 1.8 percent in June.
CBS News correspondent Ben Tracy reports that rising costs are eating into the profits of small businesses, some of which hesitate to raise prices too many times for fear of driving away customers.
At Apple Pan, one of Los Angeles' oldest family-run restaurants, inflation's affecting every part of business.
"Our gas bill, our grocery bill, our produce bill, our meat bill. Everything across the board," said owner Sonny Sherman.
CBS News Early Show anchor Maggie Rodriguez reports a new CBS News/New York Times poll shows that 67 percent of Americans believe that the state of the economy is getting worse, while only 3 percent believe it's getting better.
The news on inflation kept a lid on stock prices, which were trading mixed after one of the largest U.S. banks, Wells Fargo, announced it would raise its dividend.
Federal Reserve Chairman Ben Bernanke told Congress on Tuesday that the Fed was concerned about the threats posed by rising inflation.
Bernanke said that the "upside risks to the inflation outlook have intensified lately, as the rising prices of energy and some other commodities have led to a sharp pickup in inflation and some measures of inflation expectations have moved higher."
Bernanke's comments underscored the bind the central bank is in, caught between a faltering economy that is struggling to overcome a prolonged housing slump and a severe credit squeeze, and the risk that inflation would move higher.
"What happened yesterday was for the first time in history, we had the Treasury secretary, the head of the Fed and the head of the SEC testifying in front of Congress and talking about just how bad things are and just what they think they need to do to make them better," market analyst Art Hogan told Rodriguez.
Many analysts believe that the central bank is likely to leave interest rates unchanged for the rest of the year out of concern that any tightening of credit policy could send the economy into an even worse tailspin.
It's difficult to chart a course when uncertainty abounds, Bernanke said during his second day of Congressional testimony.
"Families are facing hardships ... this is clearly a rough time," Bernanke acknowledged. "It is clear (economic) growth has been slow and the labor market is weak. So conditions are tough on average families."
Over the past 12 months, consumer inflation is up by 5 percent, the largest year-over-year gain since a similar 5 percent rise in May 1991.
Food prices also showed a big increase in June, rising by 0.7 percent, more than double the 0.3 percent increase of May. Vegetable prices shot up by 6.1 percent, the biggest increase in nearly three years.
CBS News correspondent Jeff Glor reports that recent price jumps for consumers don't even count the cost of driving to pick everything up. Gas prices are up 26 percent from this time last year.
Bernanke added in his testimony Wednesday that over the rest of this year, the economy will grow "appreciably below its trend rate" mostly because of continued weakness in housing markets, high energy prices and tight credit conditions.
At the same time, inflation has remained high and "seems likely to move temporarily higher in the near term," Bernanke warned lawmakers.
Core inflation, which excludes energy and food, also showed rising pressures with an increase of 0.3 percent in June, up from a 0.2 percent gain in May and the biggest one-month rise since January.
This increase reflected a 4.5 percent jump in airline ticket prices, the biggest one-month rise for airline fares since March 2000.
Hogan suggests that investors stay calm through the economic turmoil and have patience.
"I think, in general, [investors should] feel safe," Hogan said. "The market has had 11 bear markets and we've survived since World War II - we're going to get through this one as well."
"I think conditions clearly call for a second stimulus," said Rep. Barney Frank, D-Mass., chairman of the Financial Services panel, during Bernanke's testimony.
Democrats in Congress are exploring more economic stimulus efforts to follow up on the $168 billion package, including tax rebates, enacted earlier this year.
Bernanke said it was a "bit premature" to go that route just yet but he didn't rule out such a course of action. He repeated his belief that the most important action Congress could take was to shore up the housing market.