Source: http://www.azcentral.com/arizonarepublic/business/articles/0816biz-economy0816.html

Falling food prices helped keep inflation contained at the wholesale level in July, but a relentless rise in energy prices is likely to make the relief short-lived.

Prices paid at the producer level increased a slight 0.1 percent last month, coming after a 0.5 percent jump just a month earlier. The improvement reflected a retreat in food prices. Core wholesale inflation, which excludes energy and food, declined 0.3 percent, the first drop in nine months.

That development sent stock prices soaring as investors believed it could provide further support for those Federal Reserve officials arguing that inflation is beginning to slow as the economy slows.

The Dow Jones industrial average ended Tuesday up 132.39 points, to close at 11,230.26.

There is still plenty of worry among investors and economists, however. Higher energy costs are expected to show up quickly in higher consumer energy bills. Private economists said they expect nasty news on core consumer inflation this morning when the government releases its monthly Consumer Price Index for July. Some forecast a 0.4 percent increase.

A component of the July producer price figure was that vehicle prices fell 2 percent, accounting for the decline in the core PPI.

"We don't want to overemphasize the weakness, for it could be reversed in coming months," said Dana Saporta, an analyst for Stone & McCarthy Research.

Meanwhile, prices for intermediate and crude goods rose further in July. The key core intermediate PPI is now up 7.9 percent in the past year, the highest in 17 months and inching closer to a cyclical high.

"There are still a lot of pressures in the system that will be subject to pass-throughs," said Ken Mayland, president of Clear View Economics. "My advice to Fed Chairman (Ben) Bernanke: Don't pop any champagne corks yet."

The Fed watches the core intermediate PPI carefully for signs that firms are facing stronger inflationary pressures, but the central bank is most focused on the prices consumers pay.

The soft reading in the PPI, if matched in the CPI, would raise hopes that inflationary pressures are easing, allowing the Fed to continue to hold interest rates steady at the Sept. 20 meeting of the Federal Open Market Committee.

Last week, for the first time in more than two years, the Fed met without raising its overnight interest rate target. The Fed said a cooling economy should reduce inflationary pressures over time. But many private economists are worried that the continued rise in energy costs could force the Fed to resume rate increases.

Price pressures have accelerated this year as energy costs have soared, reflecting rising tensions in the Middle East and tight supplies because of increased demand from emerging economies such as China.

Crude oil hit a record high, closing at $77.03 a barrel in New York trading last month. The increases in crude prices have pushed gasoline costs above $3 per gallon in many parts of the country.

For July, energy prices were up 1.3 percent, the biggest increase since a 4 percent jump in April. Gasoline prices were up 0.7 percent, natural gas for home use was up 0.9 percent and residential electricity costs jumped 1.8 percent, the biggest increase since January.

Bond yields fell, with yields on the 10-year benchmark note falling to 4.93 percent from 5 percent earlier.