WASHINGTON — A sharp jump in wholesale inflation and $100-a-barrel oil prices combined Tuesday to heighten fears that inflationary pressures will drive up mortgage rates and deepen problems in a housing sector that's dragging down the economy.
Wholesale inflation as measured by the producer price index jumped 1 percent in January, according to the Labor Department. Overall producer prices rose 7.4 percent over the past 12 months, the fastest clip since 1981.
The rise in producer prices was driven by higher prices for food, energy and medicine and was more than double the 0.4 percent rise that most mainstream economists forecast.
Many consumers have felt the pinch of inflation at the grocery store and gas pump, and the rise in prices across the economy is just as pronounced for producers.
One month of statistics doesn't make a trend, but if wholesale and consumer inflation persists, it could mean more bad news for the nation's troubled housing market.
"It is important to realize that the current crisis in the housing and mortgage markets has occurred while mortgage rates have remained relatively low. If inflation pushes rates even marginally higher, making loans that much more expensive, the negative effects on housing will be devastating," said Peter Schiff, the president of Euro Pacific Capital, an investment adviser.
Fixed-rate mortgages take their cues from long-term bonds, and when inflation is seen as problematic, investors in bonds demand higher returns. That's why lenders are raising mortgage rates, even though the Federal Reserve slashed interest rates 1.25 percentage points in late January and 2.25 percentage points since last September.
"When making loans, lenders need to know that they will make a return on their capital that is greater than the purchasing power that will be lost through inflation," Schiff said. "If inflation rises, then mortgage rates must keep pace, otherwise lending becomes a losing proposition."
Overnight rates on a 30-year fixed mortgage stood at 6.08 percent on Tuesday, up sharply from 5.82 percent a week earlier, according to the Web site Bankrate.com. Rates on a 15-year fixed mortgage stood at 5.55 percent, up from 5.24 percent a week earlier.
Stubborn wholesale and consumer inflation are muting some of the rate-cut spark sought by Federal Reserve Chairman Ben Bernanke, who'll testify before Congress Wednesday on the state of the economy.
"We're seeing inflationary pressures that have not yet ebbed. They are still growing," said Kenneth Beauchemin, a U.S. economist with forecaster Global Insight in Lexington, Mass.
There was other troubling economic news Tuesday. Crude oil prices — a chief driver of today's inflation — closed up $1.65 to settle at $100.88 a barrel on the New York Mercantile Exchange.
And the New York-based Conference Board, a private research group, issued its index of consumer confidence, which showed a sharper-than-expected drop for the second straight month. Rising gas and food prices, as well as weak employment numbers, contributed to the declining sentiment.
RealtyTrac, a real estate researcher in Irvine, Calif., reported Tuesday that foreclosures nationwide jumped 57 percent in January over a year earlier and 8 percent since December. California, Florida and Texas led other states in foreclosures.
Credit-rating firm Standard & Poor's on Tuesday released its closely watched Case-Shiller home-price index, which showed an 8.9 drop in home prices nationwide in the fourth quarter of 2007 compared with the same period in 2006. That's the largest such drop in the two decades that the index has existed. Miami led all cities with a 17.5 percent year-over-year drop in prices in the quarter.
Despite all the bad news, stocks were pulled higher Tuesday by IBM's announcement of a $15 billion stock buyback plan and relief that bond insurers who underwrite troubled mortgage bonds won't lose their coveted Triple-A ratings.
The Dow Jones Industrial Average closed up 114.70 points, to 12,684.92, the S&P 500 closed up 9.49 points, to 1,381.29, and the Nasdaq rose 17.51 points to close at 2,344.99.