Fears that the cost of living in America is rising out of control were heightened today after official data showed that factory gate prices increased at their fastest rate for 27 years.

US producer prices — a measure of the price of goods as they leave the manufacturer — rose 1.2 per cent in July compared with the month before. The increase represented a 9.8 per cent jump from July last year.

The sharp increase in producer prices, which are collated by the Labour Department in Washington, indicates that the persistently high price of oil is continuing to feed into manufacturing costs of goods such as automobiles, prescription medicines and clothing.

The price to the American consumer is often even higher, after including additional costs to retailers such as distribution, marketing and staffing.

More worryingly, the core index, which excludes food and fuel, rose at the fastest rate for 17 years, up 3.5 per cent compared with the same month the year before.

Such an increase suggests that the inflationary pressures, initially triggered by the price of oil and food, have spread across the American economy.

The unexpected rise unnerved Wall Street, which marked the Dow Jones industrial average down 113 points or 1 per cent to 11,366 in early trading in New York.

The numbers will be scrutinised by the US Federal Reserve, which is torn between keeping interest rates on hold at 2 per cent to try and nurture economic recovery, and raising the cost of borrowing to stem inflation.

Dimitry Fleming, US economist at ING, the Dutch bank, said that the data had a "strong stagflationary feel to it" and added that "although the pass-through from producer to consumer price inflation is unstable, this will still have the hawks at the Fed remain on inflation alert".

Stagflation — a term coined to describe the British economy in the mid 1960s — refers to a predicament where recession and inflation hit at the same time.

Meanwhile, the Commerce Department in Washington said that housing starts had fallen 11 per cent in July to an annual rate of 965,000 new homes.

While the fall will help to reduce the amount of oversupply of houses for sale in the US real estate market, it also indicates the severity of America's current housing slump.

Mr Fleming added: "The data leave no doubt that the housing crunch is still here. The good news is that homebuilders are adding fewer and fewer new homes to the stock. As a result, supply is now dropping to the tune of on average 2.5 per cent per month."

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