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Last Updated: Wednesday, 4 October 2006, 20:46 GMT 21:46 UK
US Fed issues inflation warning
Ben Bernanke, Fed Chairman
Mr Bernanke said the Fed would watch inflation very carefully
Federal Reserve chairman Ben Bernanke has warned that inflation is still too high in the US.

Inflation is "above what we would consider price stability", he told the Washington-based Economics Club.

However Mr Bernanke gave no indication whether interest rates would be raised further. A housing market correction would continue to dent growth, he said.

Figures released earlier on Wednesday highlighted a slowdown in the services sector, a driver behind the economy.

'Watching carefully'

In his address to the club focusing on long-term trends in the US economy, Mr Bernanke warned that entitlement schemes - including Medicare and Social Security - needed to be significantly overhauled.

Such programmes were underfunded - and if not reformed - could create a significant fiscal burdens for future generations.

We have to watch [inflation] very carefully to make sure it does not rise or even remain where it is
Ben Bernanke, Fed chairman

In answering questions after the speech, the Fed chairman said the current housing slowdown could wipe around one percentage point US growth in the second half of 2006.

However he added that inflation remained a concern: "It is something we have to watch very carefully to make sure it does not rise or even remain where it is."

After raising interest rates 17 times in a row, by a quarter of a percentage point, the Fed decided in August to keep it steady at 5.25%.

Some analysts now feel signs of a slowing economy means the Fed will pause before raising rates again.

US growth has slowed to 2.6% a year, from 5.6% in the first quarter of 2006.

'Losing momentum'

Such evidence of slower growth was evident in figures released Wednesday from the Institute for Supply Management (ISM), which saw its non-manufacturing index fall to its lowest level since April 2003, albeit still indicating growth.

The services sector covers everything from shops and restaurants to airlines and banks, and accounts for 80% of US economic activity.

News of the slackening-off in services came as the US government unveiled data for August factory orders which showed no change from the month before.

The ISM's manufacturing index had earlier in the week indicated slowing growth in the manufacturing sector.

"This tells us what we already knew about the economy - at least the services side - that generally it is losing momentum as we move into the fourth quarter," said Hugh Johnson, chief investment officer with Johnson Ellington Advisors.

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