Wholesale Inflation Leaps 0.6% in August : Economy: The increase, the sharpest in nearly four years, raises the likelihood of another interest rate hike by the Fed.

Inflation at the wholesale level took its biggest jump in nearly four years last month, touching off waves of selling on Wall Street and raising the specter of yet another Federal Reserve Board hike in interest rates.

Wholesale prices surged a surprisingly sharp 0.6% in August, led by food, gasoline, automobiles and tobacco, the Labor Department said Friday. Excluding volatile food and energy costs, the producer price index rose 0.4%.

The news sparked fears that the Fed has failed to contain inflation this year, despite five interest rate increases so far, and it sparked expectations that the central bank will move again soon.

The price report “is a cause for concern, mostly because of the intolerance the Fed has shown for any type of inflation,” said Alan Levenson, a money market economist with UBS Securities in New York.

So far this year, the government’s gauge of wholesale or producer prices, which detects inflation before it reaches consumers, has gone up at a 2.9% annual rate.

The Dow Jones industrial average closed down 33.65 points at 3,874.81, its biggest loss since June 30. At one point, the index was down 50.13.

Bonds also were hammered in their worst day in four months. The Treasury Department’s benchmark 30-year bond slumped in value, and its interest rate rose to 7.70% from 7.56% the day before.

Private analysts generally had expected the wholesale price rise to be lower, perhaps in the range of 0.4% or 0.5%. Now many analysts are guessing that the Fed will hike rates at the November meeting of its policy-setting Open Market Committee.

“The Federal Reserve cannot be pleased” by Friday’s report, said Lynn Reaser, chief economist at First Interstate Bancorp in Los Angeles.

At the same time, virtually no analysts foresee the return of 1970s-style runaway inflation. The picture that emerges, rather, is a gradual step-up of prices from an annual rate of below 3% at the consumer level last year toward a level of 3% to 4% in the coming months.

The culprit: a growing national economy that has made workers, basic materials and unused factory capacity less available and, in a growing number of cases, more expensive, economists say.

“What we saw today is perfectly consistent with a moderate, cyclical increase in inflation,” said Chris Varvares, an economist with Laurence H. Meyer & Associates in St. Louis.

The 0.4% rise in the “core” index of wholesale prices for August follows a 0.1% increase in July. The 0.6% overall jump, including all components, follows a 0.5% rise in July. The index was stable in June.

The Labor Department said food prices rose 0.7% in August, the biggest advance since a 0.8% spurt in November.

Economists on Friday described the latest price report as a genuine sign of rising inflation rather than a monthly fluke. A gauge based on the prices of 21 commodities, published by the Commodity Research Bureau, surged earlier this week, for example. In addition, surveys of industrial prices by the National Assn. of Purchasing Management have been signaling higher prices for months.

“These are leading indicators of inflation historically,” said Paul L. Kasriel, an economist with Northern Trust Co. in Chicago. “I don’t know why there’s any reason to suspect they aren’t leading indicators now.”

Still, some economists contend that today’s economic climate makes it unlikely that the emerging inflation will resemble painful episodes of the past.

First Interstate’s Reaser, for example, said corporate efforts to hold down wages and a range of cost savings brought by technology will help keep inflation below 3.5% next year.

The August price report was affected by certain temporary factors, such as a 6.9% surge in beef prices and smaller increases for pork and fish. Analysts were more troubled by the 0.7% hike in auto prices, which seemed to reflect fewer discounts by dealers.

* MARKET SLUMPS

Stock prices drop, interest rates soar on news of jump in wholesale prices. D2