Inflation’s Specter Boosts Bond Yields, Hits Stocks : Markets: August consumer price figures raise fears of a renewed upward spiral. The cost of living rose across the board.

Consumer prices took a surprising jump in August, the government reported Tuesday, reigniting inflation fears and driving interest rates up and stock prices down.

The Labor Department said consumer prices rose 0.3% last month, greater than the 0.2% generally expected by economists. Prices had risen 0.1% in July.

Prices of food, clothing and housing all advanced in August. Excluding the volatile food and energy sectors, the so-called core inflation rate also rose 0.3% last month, after a 0.1% rise in July.

While the inflation numbers remain relatively low--the expected rate for all of 1993 still is in the 3% to 3.3% range--Wall Street had hoped for a positive surprise in the August numbers. Thus, when the figure came in above expectations Tuesday, many bond and stock traders were psychologically unprepared to deal with it, analysts said.

In the bond market, the yield on the Treasury’s benchmark 30-year bond rocketed to 5.97% from 5.88% on Monday. Shorter-term bond yields also surged.

On Wall Street, the Dow industrials dropped 18.45 points to 3,615.76, and most broader stock indexes suffered deeper losses. Losers outnumbered winners by nearly 2 to 1 on the New York Stock Exchange and in the NASDAQ market of smaller stocks.

“The basic message is that inflation lives,” said Robert Dederick, chief economist for Minneapolis-based Northern Trust Co. “The notion that it was dying was exaggerated.”

Hopes that inflation was about to virtually disappear were raised Friday after the government said that wholesale prices had actually declined in August, dropping a steep 0.6% overall. But all of that decline was due to an astounding 26% fall in tobacco prices as cigarette makers slugged it out for sales in a shrinking market.

Meanwhile, another report Tuesday also suggested that the economy--and by proxy, inflation--may be stronger than believed. The Commerce Department said retail sales rose 0.2% in August, the latest in a five-month string of increases, and better than the flat sales many analysts had expected.

Perversely, bond investors have been hoping for weaker economic statistics to provide another downward push in interest rates. A slow-growing economy would in theory allow the Federal Reserve Board to cut interest rates again, even though long-term rates are already at their lowest levels in 20 years.

With Tuesday’s data, hopes for a Fed rate cut dissipated, traders said. That encouraged speculators to sell bonds, on the belief that interest rates can only rise from here as the economy expands.

However, some analysts said the bond market’s sharp reaction was more a factor of profit taking than real disappointment, given the fast decline in rates this summer. As recently as Aug. 17, the 30-year T-bond yield was 6.31%.

“This is a case of the bond market rallying a long way and people looking for excuses to take profits,” said William Dudley, senior economist at Goldman, Sachs & Co.

As long as the economy’s growth continues at a moderate pace, there is no reason for interest rates to rise significantly, many experts insist.

Interestingly, gold prices didn’t rally much Tuesday, despite the inflation report. Gold has been tumbling for the last week and thus was primed for a rally given the higher than expected consumer price data.

But gold futures on New York’s Commodity Exchange added just $2.10 an ounce to $344.80. The price had plunged $7.50 on Monday in anticipation of a low inflation report.

“It’s not clearly out of the woods yet,” said analyst Bernard Savaiko at Paine Webber, referring to gold’s recent slide from $400. “A one-day knee-jerk reaction isn’t enough” to signal an end of the market’s decline, he said.

Silver prices also showed only a small increase, gaining 6.7 cents to $3.97 an ounce in futures trading.

In the stock market, traders said investors latched on to the rise in bond yields as a reason to sell. But experts noted that a stronger economy would in the long run be good for stocks, even if it’s bad for bonds.

“You’ve had a two-month, 200-Dow-point rally,” said Alfred Goldman, head of market analysis at A. G. Edwards. “The market got ahead of itself. Bonds got ahead of themselves. It’s a normal siesta, to work off some of the froth.”

Among the market highlights:

* Airline stocks fell after several carriers announced another round of fare cuts Monday, and as AMR and UAL, parents of American and United airlines, announced layoffs and asset sales amid continuing losses.

UAL lost 4 1/4 to 142 1/4, AMR fell 3/8 to 64 3/8, Delta slid 1 5/8 to 52 5/8, USAir eased 1/4 to 13 7/8 and Southwest dropped 7/8 to 31 7/8.

* Banking shares slumped amid the rise in interest rates. J. P. Morgan sank 1 1/2 to 75 7/8, Banker’s Trust was down 2 1/2 to 80, Nationsbank lost 1 1/4 to 51 1/8 and Wells Fargo eased 1 3/4 to 118 3/8.

* Home Depot slumped 4 to a 52-week low of 36 1/4, after Goldman, Sachs removed the home improvement stores chain from its “recommended” list--citing, among other things, mounting competition.

* Technology stocks endured another selloff. Intel shed 1 1/2 to 63 1/4, Microsoft fell 1 1/8 to 75 1/4 and Apple Computer lost 1 to 24 1/4.

But Compaq, which tumbled 4 1/8 on Monday, rebounded 3 to 56 1/4 after saying investors had misinterpreted remarks about computer sales growth.

* On the upside, drug stocks staged a late rally. Pfizer surged 3 to 63 3/8, Merck added 3/4 to 32 1/8, Warner-Lambert leaped 2 to 68 5/8 and Bristol-Myers gained 1 5/8 to 58.

Overseas, stocks ended mostly higher. In London, the Financial Times 100-share index rose 0.1%. Frankfurt’s DAX index rose 0.4%. But Tokyo’s Nikkei average fell 200.32 points to 20,947.79.

Other Markets

The dollar fell against most other major currencies after the report of higher than expected inflation in the U.S. economy.

The dollar jumped briefly in a knee-jerk reaction to the price news. Inflation boosts the dollar if it nudges interest rates higher, since that increases yields on dollar-denominated investments.

But a selloff quickly ensued when dealers recalled a long string of U.S. economic data pointing to a slow recovery.

The dollar fell to 1.6090 German marks in late New York trading from 1.6110 at Monday’s close.

The dollar steadied at 105.85 yen in late New York trading, down from 106.23 yen Monday, as dealers awaited Japan’s economic stimulus package, due Thursday.