Stocks Slump Over Inflation Worries

Inflation concerns pulled U.S. stocks down for a second day Tuesday, after reports on consumer spending and manufacturing revived speculation that the Federal Reserve may continue to tighten credit.

Utility stocks, however, bucked the market downtrend: The Dow Jones utility index rose to a record high.

Most other major indexes declined. The Dow industrials lost 59.95 points, or 0.5%, to 11,125.73, the fourth loss in five sessions.

The Nasdaq composite slumped 29.48 points, or 1.4%, to 2,061.99. The Standard & Poor’s 500 was down 5.74 points, or 0.4%, to 1,270.92.

The retreat began after government data showed the Fed’s preferred gauge of inflation, linked to spending, in June matched its biggest increase since 1995.

The market’s losses widened after a survey of U.S. manufacturers reported that prices paid for raw materials in July rose the most since October.

The data could put pressure on the Fed to continue raising short-term interest rates when policymakers meet next week.

“The market’s clearly telling us that the Fed’s back in the picture and there’s the risk of additional rate hikes,” said Bob Sitko, who helps manage $580 million at USAA Private Investment Management in San Antonio.

Amid many signs of slowing economic growth, Wall Street is worried that the Fed might go too far in trying to damp inflation, and drive the economy into recession, experts said.

Falling stocks outnumbered winners by more than 3 to 2 on the New York Stock Exchange.

But inflation fears didn’t rile the Treasury bond market. The 10-year T-note yield was unchanged at 4.98%, a seven-week low.

The acceleration in inflation “is vivid, but in our opinion, it will not last as the pace of economic activity shifts further below trend,” said David Rosenberg, North American economist at Merrill Lynch in New York.

If growth does slow markedly, the Treasury market could benefit if investors bet that the Fed will begin cutting interest rates sooner rather than later.

Wall Street will get more data on the economy’s trend in July, when the government on Friday reports employment statistics for the month.

“The market is trying to read every tea leaf to gauge where the Fed is going to go, and we have a lot of data out this week,” said Bryan Piskorowski, market analyst at Wachovia Securities.

Policymakers will meet on Tuesday.

Among the day’s market highlights:

* Transportation stocks, many of which tumbled in July, fell further. The sector was hurt in part by another rise in energy prices, as crude oil futures in New York added 51 cents to $74.91 a barrel.

Alaska Airlines fell $1.33 to $35.80, Ryder System lost $1.54 to $48.86 and railroad Norfolk Southern was down $1.33 to $42.09.

* Stocks falling sharply on earnings news included Whole Foods Market, down $6.76 to $50.75; Eastman Kodak, down $3.05 to $19.20; and Burger King, down $2.01 to $13.24.

* On the plus side, earnings reports boosted Oshkosh Truck $3.51 to $46.39, IAC/InterActive $1.40 to $25.11 and IRobot $3.12 to $20.63.

* Google helped pull Nasdaq down, falling $11.09 to $375.51, its lowest closing price since June 5.

* Utility stocks were the market’s strongest major sector in the session. The Dow index of 15 utility issues rose 4.79 points, or 1.1%, to 438.21, an all-time closing high.

American Electric Power rose 29 cents to $36.41, Duke Energy gained 50 cents to $30.82 and Edison International, parent of Southern California Edison, jumped 73 cents to $42.11.

The Dow utility index is up 8.2% this year.

Utility stocks have benefited recently as some investors have sought so-called defensive issues, or companies whose sales and earnings would be expected to hold up reasonably well if the economy weakened significantly.

The stocks’ relatively large dividend payments also have attracted nervous investors. What’s more, the record heat that has afflicted much of the nation in recent weeks could temporarily boost some utilities’ earnings.