Ben Bernanke, the chairman of the US Federal Reserve, has painted a gloomy picture of slowing growth and rising inflation.
Mr Bernanke said inflation was now running at 4.4% and risked becoming “inconsistent with the objective of price stability”, acknowledging that higher food and energy costs had come as a bad surprise. The concern is that the Fed may find itself unable to cut rates quickly over coming months if the economy weakens.
Charles Dumas, global strategist at Lombard Street Research, said, “This is a stagflation story. Inflation is going up because of a falling dollar, and rising food and oil prices, and the higher cost of Chinese manufactures. These are external forces and have the effect of cutting disposable income, so the economy must weaken.
“We think the Fed will have to start cutting rates by the Autumn to prevent a hard landing. With mortgage defaults set to rise, the housing slump is clearly set to last until mid-2008 at the earliest.”
“Rising delinquencies are creating personal, economic, and social distress for many homeowners and communities – problems that likely will get worse before they get better,” said Bernanke.