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Last Updated: Wednesday, 19 July 2006, 23:51 GMT 00:51 UK
US Fed warns of inflation risks
Ben Bernanke, Fed Reserve head
Mr Bernanke is leaving the door open for an interest rate raise
US Federal Reserve head Ben Bernanke has warned that while US economic growth is slowing, rising oil prices could add to inflationary pressures.

Mr Bernanke told Senate members that higher energy and other raw material prices could "sustain inflation".

The news comes as figures showed US consumer prices rose only moderately in June, helped by falling energy costs.

However, the respite is likely to be temporary, as Middle East tensions have forced oil prices to record levels.

Interest rates

US core inflation in June was 0.3%, meaning core inflation for the past three months rose by a rate of 3.6% annually - well above the Federal Reserve's preferred level of 2% or under.

Core inflation excludes energy and food.

Persistently higher inflation would erode the performance of the real economy and would be costly to reverse
Ben Bernanke, Federal Reserve chairman

In an attempt to stall inflationary pressures, the Federal Reserve has been consistently raising interest rates.

Price stability was one of the Federal Open Market Committee's main objectives, said Mr Bernanke.

At the end of June, the Fed announced a 17th consecutive quarter-point rise, taking the rate to 5.25%.

"Persistently higher inflation would erode the performance of the real economy and would be costly to reverse," Mr Bernanke told the Senate Banking Committee on Wednesday during his twice-yearly report on monetary policy.

But he was also keen to make it clear the Fed's next steps were not fixed. "Policy must be flexible and ready to adjust in economic projections."

One factor which could contribute to lower consumer spending is the housing market, as house prices have risen at a slower pace than in recent years.

'One-day wonder'

US shares soared on the news with the Dow Jones industrial average rising 1.96% to close at 11,011.42.

I think we are limited to spasmodic moves like this, one-day wonders
Jon Brorson, Neuberger Berman

The Standard & Poor's 500 meanwhile was 1.86% up while the Nasdaq index added 1.83%.

European stocks were also boosted by Mr Bernanke's comments, with Germany's Dax up 2.64%, France's Cac 40 of leading shares up 2.37% and Britain's FTSE 100 up 1.69%.

Traders viewed Mr Bernanke's comments as a sign that interest rate increases would be stalled.

However, analysts remain divided over whether the Fed will opt to increase rates or not at its next meeting on 8 August.

Also analysts warned that Wednesday's rise could well be short-lived.

"I think we are limited to spasmodic moves like this, one-day wonders," said Jon Brorson at Neuberger Berman.


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