Bad news, Chapter 2: Consumer costs jump

WASHINGTON — The price of a quart of milk, a plane ticket and a host of other products rose in June at nearly the fastest pace in a generation, taking an even bigger-than-expected bite out of the buying power of Americans.

In the latest shock wave to hit the economy, consumer prices rose 1.1 percent in June from the month before, far faster than the expected rate of 0.7 percent and almost double the reading from May, the Labor Department said Wednesday.

The news was the back half of a one-two punch on inflation. On Tuesday, the Labor Department reported that prices at the wholesale level were rising by the highest annual rate in 27 years.

The only time in the past quarter-century that monthly inflation in consumer prices has increased so much was in September 2005, when prices jumped 1.3 percent, mostly because Hurricane Katrina shut down oil refineries and energy prices spiked.

Consumer prices are up 5 percent over the last 12 months, the fastest one-year change since 1991.

As prices rose last month, take-home pay took a hit. Adjusting for inflation, weekly wages fell 0.9 percent in June, the third straight monthly decline and the biggest drop in almost four years.

Before Congress, Federal Reserve Chairman Ben Bernanke wrapped up two days of testimony and repeated his concerns about inflation, also noting the housing slump, financial turmoil and credit troubles.

”We will work our way through these financial storms,“ he said.

He said troubled mortgage giants Fannie Mae and Freddie Mac are in ”no danger of failing.“

Trying to stem eroding investor confidence in the two companies, the Treasury Department and the Fed on Sunday offered to throw them a financial lifeline if they needed it to stay afloat. The two companies hold or guarantee more than $5 trillion in mortgages — almost half of the nation's total — and are major sources of financing for the mortgage market.

The Bush administration is asking Congress to temporarily increase lines of credit to Fannie and Freddie and to let the government buy their stock. The Fed has offered to let the companies draw emergency loans. Those pledges of aid have raised concerns on Capitol Hill and elsewhere about the government's role in intervening to ease such financial troubles and the risk posed to taxpayers.

The Consumer Price Index that came out Wednesday measures not just what Americans pay for goods but for other purchases, including services like health care and haircuts.

Higher energy costs led the way, with a more than 10 percent rise in gasoline prices. More expensive vegetables, dairy and beef pushed up food costs.

Core inflation, the figure that excludes energy and food to measure other costs, rose by 0.3 percent in June, the fastest rise since January. Airline tickets grew almost 5 percent more expensive, the biggest rise since the summer of 2001.

The report illustrates just how quickly prices are rising — not that the economic squeeze is anything new to most Americans.

On Wall Street, the inflation report was tempered by falling oil prices. The Dow Jones industrial average rose 276 points, the biggest one-day jump in three months. Oil prices are still about 80 percent higher than they were a year ago.

The Fed released the minutes of its June 24-25 meeting, revealing officials were worried then about inflation and believed their next move would be to raise interest rates.

That would follow a period of aggressive rate cuts that were designed to keep the economy from sinking into recession because of problems in the housing market and the financial industry.

Still, private economists said they thought the Fed will not seriously contemplate a rate hike for many more months, worried about upsetting the fragile economy.

In Congress, Democrats seized on the inflation report to push a second economic stimulus package because the inflation risk is crimping the Fed's room to cut interest rates farther.