Bernanke warns of continued inflation threat (2nd Roundup)

By Anne K Walters Jul 16, 2008, 21:02 GMT

Washington - In a second day of Congressional testimony, US central bank chief Ben Bernanke warned Wednesday that inflation could continue to threaten the economy, while government figures showed rocketing petrol prices had pushed inflation in June to the largest year-over-year increase since 1991.

Consumer prices were up 5 per cent from June 2007, the highest such increase since May 1991, compared to a 4.2 per cent gain in May, the US Labour Department said.

The Consumer Price Index increased to a seasonally adjusted 1.1 per cent in June from 0.6 per cent the previous month, the highest monthly increase since 2005, the department figures released Wednesday showed.

'With gasoline and other consumer energy prices rising in recent weeks, inflation seems likely to move temporarily higher in the near term,' Bernanke told the a finance committee in the US House of Representatives.

Rising inflation could eventually put further pressure on the Federal Reserve to increase interest rates after a series of cuts aimed at bolstering the faltering economy, but analysts said Bernanke appeared to indicate rates would remain steady when it meets again August 5 and for some time to combat ongoing issues in the financial sector.

'Given the high degree of uncertainty, monetary policy makers will need to carefully assess incoming information bearing on the outlook for both inflation and growth,' Bernanke said Wednesday. 'In light of the increase in the upside inflation risk, we must be particularly alert to any indications, such as an erosion of longer-term inflation expectations, that the inflationary impulses from commodity prices are becoming embedded in the domestic wage- and price-setting process.'

In June, Bernanke said that the threat of an economic downturn had diminished, and the Fed had left the benchmark interest rate unchanged at 2 per cent - after seven cuts since September. But minutes from the Fed's meeting, which were released Wednesday, indicated some members had pushed for rate increases.

Soaring energy prices made up two-thirds of the June increase, with the energy index rising 6.6 per cent from a 4.4 per cent increase in May. Food prices rose 0.8 per cent, while core prices, which exclude food and energy, were up 0.3 per cent.

Bernanke stressed that the inflationary pressures of fuel and food had yet to spill over into other areas, but noted businesses could begin to pass along more of those costs to consumers.

The closely-watched remarks reflected renewed turmoil in markets that prompted the government over the weekend to shore up Fannie Mae and Freddie Mac, mortgage companies chartered by the federal government but owned through publicly traded shares, with guarantees to back their debt if needed.

Bernanke defended the move in the face of criticism from members of Congress, stressing the firms' importance to the housing market.

'In the near-term, thinking about the needs of the housing market, I think the right solution is to keep them in their current form but to provide very strong oversight that will assure adequate capital going forward,' he said, adding the firms were not in danger of failing and regulators could consider options from nationalization to privatization to keep the mortgage firms solvent in the future.

His testimony came a day after he addressed a similar Senate committee, warning that the US economic outlook was 'uncertain.'