Stocks fall as inflation rises

NEW YORK — Stocks fell sharply Tuesday after a hefty jump in wholesale inflation and a drop in new home construction gave investors more reasons to believe the economy won’t rebound anytime soon. The Dow Jones industrial average dropped by more than 100 points.

The Labor Department said its Producer Price Index rose by 1.2 percent in July, more than double the expected rate. The increase means prices have risen in the past 12 months at the fastest pace in 27 years.

The data also showed that core wholesale inflation, which excludes food and energy prices, rose 0.7 percent — the biggest increase since November 2006 and more than triple the 0.2 percent rise in core prices that had been expected.

“Maybe investors were hoping to shrug off the challenges of high commodity prices and inflation,” said Jack A. Ablin, chief investment officer at Harris Private Bank. “But now we find out that perhaps the inflation situation is worse than we thought.”

A weak report on new home construction did little to quell investors’ worries. The Commerce Department said July housing starts fell to an annual rate of 965,000 units — higher than analysts predicted, but the lowest level in more than 17 years nonetheless.

Tuesday’s pair of economic reports indicated not only that the financial sector is struggling to right itself after billions of dollars in credit losses, but also that the rest of the economy is still showing significant signs of stress.

The weakness in housing has not only imperiled home builders and suppliers, but has left financial companies reeling over how to cope with soured mortgage debt. Lehman Brothers Holdings Inc., for one, came under pressure Tuesday after a JPMorgan Chase & Co.

analyst estimated that Lehman will have to write down its investments during the third quarter by $4 billion.

In midmorning trading, the Dow Jones industrial average fell 120.09, or 1.05 percent, to 11,359.30.

Broader stock indicators also dropped. The Standard & Poor’s 500 index fell 11.95, or 0.93 percent, to 1,266.65, and the Nasdaq composite index fell 24.49, or 1.01 percent, to 2,392.49.

Bond prices ticked higher after the economic reports. While investors often seek the shelter of government debt when bad news arrives, inflation is unwelcome for bonds because it devalues their fixed returns. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.80 percent from 3.82 percent late Monday.

The dollar was lower against most other major currencies, while gold prices fell.

One of the few bright spots has been the price of oil. Crude has fallen substantially from its July record above $147 a barrel, and fell 30 cents to $112.57 a barrel Tuesday on the New York Mercantile Exchange.

Lehman fell 78 cents, or 5.3 percent, to $14.25. There have been reports swirling that the investment bank might have to sell one of its businesses to raise cash.

Retailers reported mixed quarterly results, adding to investors’ uncertainty about the economy.

Home Depot Inc. reported a 24 percent decline in its second-quarter earnings but topped Wall Street’s expectations. The nation’s largest home improvement retailer reiterated its forecast for the year. Shares dipped 16 cents, to $26.80.

Target Corp. said its second-quarter earnings fell 7.5 percent but beat forecasts despite anemic sales. Shares fell 68 cents to $49.37.

And Saks Inc. reported a wider-than-expected loss in the second quarter as its affluent shoppers cut back on apparel. The luxury goods retailer also issued a downbeat forecast for the year. Share dropped $1.12, or 10 percent, to $10.10.

The Russell 2000 index of smaller companies fell 10.01, or 1.35 percent, to 731.96.

Declining issues outnumbered advancers by about 4 to 1 on the New York Stock Exchange, where volume came to 173.4 million shares.

Overseas, Japan’s Nikkei stock average fell 2.28 percent. In afternoon trading, Britain’s FTSE 100 fell 1.81 percent, Germany’s DAX index lost 1.63 percent, and France’s CAC-40 fell 1.92 percent.