Stocks fall as data show drag of higher oil

Tuesday's economic data illustrated how the steep run-up in energy costs this year is affecting businesses. The Labor Department said its index of producer prices jumped 1.4 percent in May--the largest increase since November.

The core producer price index, which strips out often volatile food and energy prices, rose by a mild 0.2 percent. But Wall Street remains concerned that companies are having to swallow ballooning costs--and may soon be forced to pass them on to already strapped customers. Although crude dipped to about $134 a barrel Tuesday on the New York Mercantile Exchange, it remains near record levels.

Subodh Kumar, global investment strategist at Subodh Kumar & Assoc. in Toronto, said inflation concerns are weighing on stocks as investors try to readjust their models to factor in the effects of energy prices staying high. The price of oil has doubled in the past year, prompting some investors to call it a bubble, but others say a pullback in prices would only lessen--not eliminate--the pricing pressure.

"The market and bonds are recalibrating themselves lower because of inflation," Kumar said.

Meanwhile, Goldman Sachs--despite posting a tamer-than-expected 11 percent decline in quarterly profit--aggravated jitters by releasing a downbeat report on the broader banking industry. The report estimated that credit losses from deterioration in the mortgage and lending markets will not peak until early 2009, and that U.S. banks, having already raised about $120 billion in capital, will need to raise an additional $65 billion.

"We're back in the mode where people are guessing how many more billions of financial institution write-offs there are going to be. ... That, and what's going to happen with inflation," said Scott Wren, equity strategist for Wachovia Securities.

The Dow fell 108.78, or 0.89 percent, to 12,160.30.

Broader stock indicators also declined. The Standard & Poor's 500 index fell 9.21, or 0.68 percent, to 1,350.93, while the Nasdaq composite index fell 17.05, or 0.69 percent, to 2,457.73.

Bond prices rose on sluggish economic data. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 4.20 percent from 4.27 percent late Monday.