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Last Updated: Friday, 29 February 2008, 16:29 GMT
Inflation rise hits US consumers
Macy's shopper
Macy's has had to shed thousands of jobs to offset falling sales
US consumer spending rose more than expected in January, but much of the gain was down to rising prices.

The Commerce Department said personal spending rose 0.4% last month, a bigger rise than economists were expecting.

But the report showed that a key gauge of inflation rose 0.4%, with shoppers spending more on food and fuel.

Economists say there is a danger of "stagflation" in the US - a situation where the economy is not growing, accompanied by high inflation.

However, on Thursday, Federal Reserve chairman Ben Bernanke told US lawmakers that he did not expect a period of stagflation.

Instead Mr Bernanke expects rising oil, metals and food prices to level out.

He also hinted that the Fed was poised to cut interest rates below 3% if problems in the housing and credit markets threatened to push the US economy into negative growth.

'Weak picture'

On Thursday, revised figures from the US Department of Commerce confirmed that US economic growth dropped sharply in the last three months of 2007 after spending on new housing collapsed.

Also this week, Freddie Mac and Fannie Mae, which guarantee about 45% of US mortgages, both reported huge net losses for 2007, and warned of further bad news as the glut of unsold homes increases, house prices drop and mortgage defaults stack up.

Analysts say it is crucial for consumer spending, which accounts for two thirds of US gross domestic product, to remain robust in order to prevent the economy from a recession.

But fears are growing that consumers are being squeezed too far.

"It is a weak picture of the consumer. Income growth, the raw material for spending, is fading." said Robert Brusca of FAO Economics.

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