updated 11/18/2004 8:43:33 AM ET 2004-11-18T13:43:33

Stocks bounded higher Wednesday, as investors shrugged off a fresh indicator of rising inflation and welcomed an $11 billion deal that combines retailers Kmart Holding Corp. and Sears, Roebuck and Co. Climbing oil prices kept a lid on gains, however, in light of a potential heating oil supply crunch.

Major Market Indices

The merger, the largest such transaction involving U.S. retailers, strong data on industrial production and a jump in housing construction overshadowed a worrisome reading of the Consumer Price Index, the government’s most closely watched inflation barometer. The latest inflation data followed a sharp 1.7 percent increase in the Producer Price Index, which sent stocks falling Tuesday.

“This is a terrific rebound, and startling in the face of the twin jumps in inflation that we’ve had over the last couple of days. The market is definitely saying that inflation is not the problem right now, it’s still a question of growth,” said Ken Tower, chief market strategist for Schwab’s CyberTrader. “Mergers are bullish in general, because they show business confidence ... I think the merger just backs up the economic stuff. It’s part of the same growth-in-the-economy theme.”

The Dow Jones industrial average finished the session up 61.92 points, or 0.6 percent, at 10,549.57, after surging more than 100 points earlier in the day.

Broader stock gauges were also higher at the close, though they too lost some of their earlier momentum. The Standard & Poor’s 500-stock index rose 6.51 points, or 0.6 percent, to 1,181.94, while the technology-rich Nasdaq composite index gained 21.06 points, or 1.01 percent, and closed at 2,099.68 — it’s best showing since Jan. 27.

Rising costs for energy and food sent the Consumer Price Index up 0.6 percent in October, the biggest advance in five months. Analysts said the Labor Department’s latest snapshot of the inflation climate makes it more likely that the Federal Reserve will raise interest rates when policy makers meet on Dec. 14.

Excluding volatile energy and food prices, “core” inflation increased by a more modest 0.2 percent in October. Both readings were higher than economists had forecast.

In Wednesday’s other economic news, industrial production shot up 0.7 percent, a reading that suggests the sector is gaining momentum. Home builders showed strength after the Commerce Department reported a 6.4 percent jump in housing construction last month.

“It’s quite obvious that the merger itself is good news, and of course the fact that we had industrial production taking off has helped strengthen the market,” said Peter Cardillo, chief strategist with S.W. Bach & Co. “On the inflation front, that’s not such good news, but the effects of $50-plus oil prices are beginning to show up in the numbers, and going forward, that could make the Fed more aggressive” in raising interest rates.

Oil futures traded higher after the U.S. government’s weekly report on fuel inventories. Crude inventories rose for an eighth straight week, up 800,000 barrels, but the supply of distillate fuels, which include heating oil and diesel, fell by 1 million barrels. Traders had been hoping for a build in distillate inventories ahead of the winter heating season. Light, sweet crude for December delivery settled 73 cents higher at $46.84 per barrel on the New York Mercantile Exchange. Heating oil futures surged 8.45 cents, or 6 percent, to $1.41 per gallon.

Adding to crude’s volatility: In Russia, embattled oil giant OAO Yukos said Moscow’s all-out assault to collect back taxes could force it to halt its daily output of over 2 million barrels; in Nigeria, the world’s No. 7 exporter, rebels vying for the oil-rich Niger Delta stopped handing over their weapons to a government-appointed disarmament commission claiming the process was not transparent; and in Iraq, saboteurs attacked a pipeline and well near northern Kirkuk.

Discount chain operator Kmart soared $7.78, or 7.7 percent, to $109.00, on its plan to merge with Sears, a deal that will create the nation’s third-largest retailer. Sears stock skyrocketed after the merger was announced, rising $7.79, or 17 percent, to $52.99.

The combined company is expected to have $55 billion in annual revenues, 2,350 full-line and off-mall stores, and 1,100 specialty retail stores, meaning it will trail only Wal-Mart Stores Inc. and Home Depot Inc. Other retailers posted declined on the news; Wal-Mart shed 65 cents to $56.24, Home Depot closed down 72 cents at $42.28, and Target Corp. lost 36 cents to $51.02.

Martha Stewart Living Omnimedia rose $1.09, or 6.3 percent, to $18.49, as investors bet the merger would lead to a broader merchandising agreement. Kmart sells Martha Stewart products in the United States, while Sears sells the company’s products in its stores in Canada.

Dow component Hewlett-Packard Co. rose 52 cents to $20.20, after the computer and printer maker reported fourth-quarter results that beat Wall Street expectations. Excluding charges, HP earned 41 cents per share, 4 cents better than the average analyst estimate.

Overseas, Japan’s Nikkei average shed 0.3 percent. In Europe, France’s CAC-40 rose 1.3 percent, Britain’s FTSE 100 added 0.5 percent and Germany’s DAX index surged 1.6 percent.

© 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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