Inflation's hot now, but it should cool off

Inflation will likely ease in coming months, but prices are expected to stay elevated, keeping pressure on consumers, businesses and the Federal Reserve.

Wholesale prices rose 9.8% in the 12 months ended in July, the fastest annual pace in 27 years, the government said Tuesday. The report showed inflation was spreading into a wide range of goods outside of just energy and food.

The news helped push stock prices lower. The Dow Jones industrial average fell 131 points, or 1.1%, to 11,349.

But analysts say they expect the inflation picture to gradually improve in coming months in light of the recent drop in the price of oil and other commodities. And a marked slowing in the global economy will make it harder for companies to pass along increased costs.

"Inflation pressures have peaked," Ken Mayland, president of ClearView Economics, said in a note to clients.

Joel Naroff of Naroff Economic Advisors notes it will take time, however, for price pressures to subside. "It took a long time for the surge in commodity prices to seep into the general economy, so don't expect one month of commodity price declines to suddenly turn off the inflation pump."

The producer price index, a measure of prices charged for goods by factories, farmers and wholesalers before they reach the retail level, rose a seasonally adjusted 1.2% in July, the Labor Department said.

Energy prices were up 28% from a year earlier. Prices rose for electricity and natural gas, and wholesale heating oil costs were up 80.6% from a year earlier. Food prices were up 8.7% from July 2007.

But wholesale inflation was not limited to the usual culprits, suggesting high costs for energy and other crude products are seeping into the prices for a wide array of goods such as clothes, cars and jewelry. Outside of food and energy, producer prices rose 0.7% in July. So-called core prices, up 3.6% over 12 months, posted their biggest yearly gain since 1991.

Last week, the government said prices at the consumer level in July were up 5.6% from a year ago, also the largest increase since 1991.

Oil prices have fallen 21% since peaking July 3. Tuesday, the price of a barrel of crude oil for September delivery rose $1.66 to $114.53.

Despite the decline, the price of oil is still more than twice as high as it was a year ago, putting upward pressure on inflation. Price pressures have the Federal Reserve in an uncomfortable bind. While the Fed usually raises rates to curb inflation, a slow economy has forced policymakers to sit on the sidelines.

Meanwhile, Dallas Fed President Richard Fisher in a speech Tuesday said the Fed must be prepared to raise rates if inflation does not ease.