Wall Street stumbled Tuesday after oil prices spiked to a new record above $129 a barrel and a government report raised investors' concerns about the impact of inflation on consumer spending.
The Dow Jones industrials fell nearly 200 points.
Crude jumped after OPEC's president was quoted as saying his organization won't raise its output before its next meeting in September. That sent a barrel of light, sweet crude to a trading high of $129.60 before it finished just above $129 a barrel on the New York Mercantile Exchange. At filling stations across the country, the national average price for a gallon of regular gasoline touched $3.80 for the first time, having followed oil's spectacular rise.
Meanwhile, the Labor Department's producer price report indicated higher energy and food prices might be seeping into other parts of the economy compounding investors' concerns raised by higher oil. The department said wholesale inflation edged up by 0.2 percent in April, following a 1.1 percent jump in March, but outside of food and energy, prices rose by a faster 0.4 percent double what analysts expected.
Over the past 12 months, core inflation has risen by 3 percent, the highest reading in more than 16 years.
The pressures in April came from a number of areas, with the price of new cars, toys and pharmaceutical products all showing increases. Commercial furniture prices jumped by the largest amount in 27 years. Analysts said some of this is probably reflecting the weaker dollar, which is driving up the cost of imports.
Consumers, already struggling with record-high gasoline prices and rising food bills, could now start to see price increases in these other areas, as well, economists said, noting that the price of products at earlier stages of production showed even bigger increases in April.
"We can see a steady spreading of wholesale price increases into the more general economy," said Joel Naroff, chief economist at Naroff Economic Advisors.
Wall Street is worried that a drop-off in consumer spending could ensue if wholesale price increases are passed along. Consumer spending is critical because it accounts for more than two-thirds of the U.S. economy.
Analyst Stephen Leeb believes escalating oil prices and their fallout have now replaced the health of the financial sector as the market's biggest worry. He said rising energy creates a "very vicious circle" through the economy and thinks the government must take some kind of action to bring down prices.
"Stock investors are watching oil, period," said Leeb, whose New York-based Leeb Capital Management focuses on crude and its impact on equities. "The events that moved the market before revolved around write-offs and foreclosures, but all that's changed."
The retreat in major indexes reversed the optimism of last week, when stocks rose on a growing belief that the economy is still managing to plod along, despite worries about both oil prices and the global credit crisis. The loss showed that the market has yet to shake off the volatility that has plagued it since the credit crisis began last summer.
The mood on the Street was further depressed Tuesday by sluggish retail reports and comments from Federal Reserve Vice Chairman Donald Kohn that policymakers are inclined to hold interest rates steady. The Dow fell 199.48, or 1.53 percent, to 12,828.68, logging its biggest daily slide since a 206-point drop on May 7.
Concerns about rising inflation, spurred by higher prices for commodities, were the topic of a speech by Kohn. The policymaker said he was cautiously upbeat that the economy will recover and that the central bank "appears to be appropriately calibrated" to manage inflation over the medium term.
But a forecast released Monday by the National Association for Business Economics, whose members are on-the-ground economists at U.S. and global corporations, was more gloomy.
"While our panel anticipates an improvement in credit markets and a bottoming out in housing this year, the forecasters have marked down their estimates for growth for both 2008 and 2009," said Ellen Hughes-Cromwick, NABE's president and chief economist at Ford Motor Co., in releasing the survey of 52 business economists.Some 56 percent of NABE economists surveyed believe the U.S. economy is now in recession, and they project that unemployment will rise from the current 5 percent to an average of 5.6 percent next year.
Contributing: McClatchy Newspapers