Inflation grows at fastest pace in 27 years

WASHINGTON (AP) -- The economy showed the depth of its twin problems on Tuesday, slow growth and rising inflation, as the nation wrestled with a teetering financial system, a slumping dollar and rising prices for food and fuel.

The Labor Department reported that soaring costs for gasoline and food pushed inflation at the wholesale level up by a bigger-than-expected 1.8% in June, leaving inflation rising over the past year at the fastest pace in more than a quarter-century.

Over the past 12 months, wholesale prices are up 9.2%, the largest year-over-year surge since June 1981, another period when soaring energy costs were giving the country inflation pains.

Core inflation, which excludes energy and food, was better behaved in June, rising by just 0.2%, slightly lower than expectations.

Retail sales: A separate report from the Commerce Department showed that all the economy's problems were weighing on the consumer. Retail sales edged up by a tiny 0.1% in June, weaker than had been expected, as consumer spending was held back by a sharp plunge in sales at auto dealerships.

Stocks: U.S. stocks headed for a sharply lower open as the reports on inflation and retail sales failed to cool concerns about the financial sector. Banking stocks were pounded on Monday despite the government's efforts to calm concerns with a support package fashioned over the weekend for mortgage giants Fannie Mae and Freddie Mac.

Fed: Federal Reserve Chairman Ben Bernanke, who was scheduled to deliver his midyear report on the economy to Congress on Tuesday, was expected to highlight the threat posed by inflation pressures. The central bank at its June meeting brought an end to an aggressive rate-cutting campaign that had been designed to keep a prolonged housing slump and severe credit crunch from pushing the country into a deep recession.

The central bank is currently caught between the opposing forces of rising inflation and slumping economic growth.

Rising prices, weaker sales: For June, energy prices at the wholesale level shot up by 6%; the price of unleaded regular gasoline surged by 9% following an even bigger 9.6 % increase in May.

The 0.1% rise in retail sales was even weaker than the 0.4% gain that analysts had been expecting.

That small rise reflected a 3.3% drop in sales at auto dealerships, offsetting a big 4.6% jump in sales at gasoline stations, an increase that largely mirrored last month's huge jump in pump prices.

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