Stocks shoot higher on inflation report

NEW YORK » An unexpected drop in wholesale prices sent stocks soaring yesterday, with the Dow Jones industrials climbing more than 130 points as Wall Street gained renewed confidence in the Federal Reserve's management of inflation and the economy.

Prices at the wholesale level, with food and fuel prices removed, fell 0.3 percent in July, according to the U.S. Labor Department, the best showing for core inflation in nine months.

Including energy and food, wholesale prices edged up 0.1 percent, well below the 0.5 percent jump in June.

The report lifted the pall that has hung over the markets all summer, brought on as investors fretted about inflation and whether the Federal Reserve's pause in rate hikes last week would be short-lived.

With prices falling, however, the Fed under new Chairman Ben Bernanke could engineer the "soft landing" Wall Street was looking for, balancing slower economic growth with inflation pressures and leaving corporate profits relatively intact.

"I think the feeling here in the market is that the Fed may have actually nailed it," said Bill Groenveld, head trader for vFinance Investments. "Of course, now we have to take a close look at earnings and hope they'll still be OK, but right now, overall you have to feel pretty good. I think this market could get exciting."

The Dow rose 132.39, or 1.19 percent, to 11,230.26. Broader stock indicators also advanced. The Standard & Poor's 500 index rose 17.37, or 1.37 percent, to 1,285.58, while the Nasdaq composite index gained 45.97, or 2.22 percent, to 2,115.01.

Advancing issues outnumbered decliners by more than 5 to 1 on the New York Stock Exchange, where final consolidated volume came to 2.4 billion shares, up from 2.18 billion traded Monday.

The Russell 2000 index of smaller companies was up 16.10, or 2.36 percent, at 697.83.

Bonds also rose sharply on the government's inflation report, with the yield on the benchmark 10-year Treasury falling to 4.93 percent from 5 percent late Monday. The dollar fell against most major currencies, while gold prices also slid.

Crude prices edged lower, with a barrel of light crude settling at $73.05, down 48 cents on the New York Mercantile Exchange.

The markets got additional support from a New York Federal Reserve report showing manufacturing activity in the region declined this month. The news added to growing evidence of a moderating economy, which would also serve to keep prices moderate and further encourage the Fed to avoid raising rates.