WASHINGTON (Reuters) - Wholesale prices shot up in July at the fastest year-on-year rate since 1981, while home builders cut back on construction as they worked through a glut of unsold homes, government data showed on Tuesday.

The reports offered little solace to the Federal Reserve, which is hoping a slowing economy will cool inflation so the central bank can hold off raising interest rates.

"Two consecutive elevated readings on core consumer prices, combined with today's worrisome report on producer prices, will be hard for the Fed to overlook at its next meeting" (on September 16), said Kenneth Beauchemin, U.S. economist with Global Insight in Lexington, Massachusetts.

"That said, recent and further evidence of significant economic weakness makes it unlikely for the Fed to push up interest rates this year," he added.

The Labor Department's Producer Price Index, which measures prices at the factory door, climbed 1.2 percent after a 1.8 percent gain in June. So-called core producer prices, which exclude food and energy, jumped 0.7 percent in July after a 0.2 percent June increase.

Economists polled by Reuters had expected producer prices to rise just 0.6 percent in July, and had forecast that core prices would be up only 0.2 percent.

A sharp decline in oil prices since mid-July led many investors to conclude that inflation pressures were subsiding, and many economists said the July report would likely be the worst for a while.

The steep jump in core prices rattled U.S. financial markets, driving stock indices down more than 1 percent. U.S. Treasury debt prices initially rose as investors looked for a safe haven from falling stocks, but later turned mixed.

STARTS AND STOPS

"There's nothing good about it," said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co in San Francisco. "Inflation is more systemic than they were leading us to believe in the past numbers and it will continue to show up in the CPI number for months to come. The question is whether or not investors can shake it off knowing that the price of oil has come down.

"The Fed is stuck between a rock and a hard place, and it shows," he added.

Separately, the Commerce Department reported that U.S. home building projects started in July fell 11 percent to the lowest annual rate in more than 17 years, while building permits tumbled 17.7 percent.

The annual pace of housing starts, at 965,000, was slightly above Wall Street's expectations of 960,000. But it was the lowest since a 921,000 unit rate in March 1991. In June, housing starts rose 10.4 percent, revised up from the previously reported 9.1 percent gain.

"The U.S. economy is growing and showing great flexibility, but we're in a period of slow growth," White House spokesman Tony Fratto said. "When the housing sector returns we expect broader economic activity to return as well."

Building permits, an indicator of future construction, dropped to an annual rate of 937,000, well below the 970,000 analysts polled by Reuters had forecast. It was the lowest level since March, when they were 932,000, the Commerce Department said.

Single family homes, which constitute the bulk of new housing, were especially weak. The annual unit rate of 641,000 single family homes started in July was the lowest since January 1991, when they were 604,000. Building permits were 584,000, the lowest since 523,000 in August 1982.

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(UPI) – Likely Democratic presidential candidate Barack Obama is visiting rural America, where aides say he can focus on the U.S. economy and win back critical votes.

Reviving his stump in non-major metropolitan areas gives Obama a chance to draw distinctions between his economic plan and that of his likely Republican presidential challenger Sen. John McCain of Arizona, The Washington Times reported Monday.

"This election is about whether or not we are going to sustain and maintain the American dream for the next generation," Obama told voters in Reno, Nev., during a town hall Sunday. An Obama presidency would push "an economy that's working not just for some, but for all," he said.

The U.S. senator from Illinois is trying to appeal to lower-income white voters who supported him early in the primary-and-caucus season, but later migrated to primary rival Sen. Hillary Clinton of New York, the Times said.

But he has to do more than just talk, said Dave Saunders, who has helped develop a rural strategy for Democratic candidates with rural strategy.

"He needs to get out there and tell them the American worker deserves a shot, because they don't watch cable news," Saunders told the Times.

WASHINGTON (Reuters) - Consumer prices rose at twice the rate expected in July to post the fastest rate of year-over-year growth in 17-1/2 years, pushed up by costlier energy and food, a government report on Thursday showed.

The Labor Department said the Consumer Price Index, considered a key gauge of inflation, rose 0.8 percent in July after a 1.1 percent jump in June. That was far above the 0.4 percent gain that economists polled by Reuters had forecast for July.

Prices were up 5.6 percent from a year ago, the sharpest year-over-year rise since 5.7 percent in January 1991. That was also well above the 5.1 percent increase that economists had forecast.

Energy prices rose 4 percent in July after a 6.6 percent June gain and were up 29.3 percent on a year-over-year basis. Food costs rose 0.9 percent following a 0.8 percent June increase and put food costs 6 percent higher than a year ago.

Excluding volatile food and energy items, the so-called core CPI rose 0.3 percent in each of June and July, slightly above forecasts for a 0.2 percent gain in July. On a year-over-year basis, core prices rose 2.5 percent in July, slightly more than the 2.4 percent rise that was forecast.

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