Economy: Us Inflation Jumps to 5.6% But May Have Peaked

Fears that the US economy is facing a period of stagflation were heightened yesterday by news that foreclosures in the crisis-hit housing market were rising at an annual rate of 55% while the cost of living rose by a 17-year-high of 5.6%.

The White House admitted it would take time for the economy to recover after a survey by RealtyTrac said that 272,171 homes - one in 464 - received a foreclosure notice in July. The plunge in house prices and more expensive mortgages have badly affected those who bought during the boom and auction sale notices, default notices and bank repossessions were up 8% from June.

"The sharp rise in bank repossessions, combined with slow sales, has resulted in a bloated inventory of bank-owned properties for sale," said James Saccacio, the chief executive of RealtyTrac, an online market place for foreclosed homes.

Cape Coral-Fort Myers in Florida registered the worst foreclosure rates of the 230 metro areas tracked, with one in every 64 households receiving a filing. Other black spots were Nevada, where foreclosures rose by 97% in the past year, and California, with 72,285 foreclosures in July.

Meanwhile, the US labor department said consumer prices rose 0.8% in July - double the increase expected by Wall Street - taking the annual inflation rate from 5% to 5.6%, the sharpest year-on-year increase since January 1991. Analysts said record oil prices and 6% food price inflation were partly responsible, but expressed concern that core inflation - which strips out the effects of fuel and food prices - rose by 0.3% to 2.5%.

The Federal Reserve tends to pay more attention to the core measure of inflation than the headline rate, and the dollar rose yesterday - despite the foreclosure figures and poor data for unemployment - on concerns that the US central bank would raise interest rates this year. Weekly jobless claims fell by 10,000 to 450,000 but were still far higher than the markets had feared, while the four-week moving average of 440,500 was the highest in more than six years.

Analysts said cheaper commodity prices meant inflation may now have peaked. "If we don't get an unexpected shock that pushes commodity prices back up, this might be the worst inflation news we'll get for a while," said Gary Thayer at Wachovia Securities.