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US inflation rate at 17-year high US inflation rate at 17-year high
(29 minutes later)
US inflation accelerated at its fastest pace in 17 years in June, official figures have shown, driven higher by surging energy pricesUS inflation accelerated at its fastest pace in 17 years in June, official figures have shown, driven higher by surging energy prices
Consumer prices were 5% higher than a year ago and rose 1.1% on a monthly basis, the Labor Department said.Consumer prices were 5% higher than a year ago and rose 1.1% on a monthly basis, the Labor Department said.
Federal Reserve boss Ben Bernanke said on Tuesday that the threat of rising inflation had intensified recently. Federal Reserve boss Ben Bernanke has warned that the threat of rising inflation has intensified recently.
High inflation will make it harder for the Fed to cut rates and boost an economy hurt by a housing market slump. Minutes from the Fed's latest meeting on interest rates indicated the next move in borrowing costs could be up.
June's annual inflation increase is the highest since 1991 while the monthly jump is the sharpest since September 2005. It faces the dilemma of having to stem the rise in inflation while not further choking an economy under serious strain.
'Fed in a hole''Fed in a hole'
The Fed chairman, who faces his second day of congressional testimony on Wednesday, also warned about the "downside" risks to growth in the world's largest economy. June's annual inflation increase was the highest since 1991 while the monthly jump is the sharpest since September 2005.
There is so much uncertainty in the market right now that news of higher inflation doesn't mean a rise in interest rates Stephen Malyon, Scotia Capital In his second day of congressional testimony on Wednesday, the Fed boss said inflation was too high and it was a key objective for the central bank to bring it down.
Many analysts now believe that the central bank may have to leave borrowing costs on hold as it tries to steer a faltering economy through turbulent times. Many analysts now believe that the central bank may have to leave borrowing costs on hold, or even increase them, as it tries to steer a faltering economy through turbulent times.
"There is so much uncertainty in the market right now that news of higher inflation doesn't mean a rise in interest rates," said Stephen Malyon, analyst at Scotia Capital in Toronto. This increases concern that the Fed is not going to be able to lower interest rates if the economy remains weak Gary Thayer, from Wachovia Securities
The US faces a severe housing slump, a credit crunch and financial market turmoil stemming from the collapse of the sub-prime mortgage market. At the same time as inflationary pressures are rising, the US faces a severe housing slump, a credit crunch and financial market turmoil stemming from the collapse of the sub-prime mortgage market.
According to minutes of the Fed's interest rate meeting in June, policymakers believed "the next change in the stance of policy could well be an increase" due to "upside risks to inflation and inflation expectations".
The impact of surging living costs in June "really puts the Fed in a hole," said Alan Ruskin, an economist at RBS Greenwich.The impact of surging living costs in June "really puts the Fed in a hole," said Alan Ruskin, an economist at RBS Greenwich.
Gary Thayer, from Wachovia Securities, agreed that the Fed was facing a tricky balancing act.Gary Thayer, from Wachovia Securities, agreed that the Fed was facing a tricky balancing act.
"This increases concern that the Fed is not going to be able to lower interest rates if the economy remains weak," "This increases concern that the Fed is not going to be able to lower interest rates if the economy remains weak."
"And as long as the economy remains weak, it will be hard for the Fed to raise rates to fight inflation." But he added: "And as long as the economy remains weak, it will be hard for the Fed to raise rates to fight inflation."
Energy surgeEnergy surge
Energy prices were the main driver of price growth, and were 6.6% higher in June as the cost of petrol, natural gas and heating oil increased.Energy prices were the main driver of price growth, and were 6.6% higher in June as the cost of petrol, natural gas and heating oil increased.
Expectations that that a slowing US economy will dampen demand for oil helped crude prices drop 42 cents to $138.32 in pre-market trade in New York.Expectations that that a slowing US economy will dampen demand for oil helped crude prices drop 42 cents to $138.32 in pre-market trade in New York.
The annual core inflation rate, which strips out volatile fuel and food prices, was 2.4%. Annual core inflation, which strips out volatile fuel and food prices, touched 2.4%.
The surge in living costs has also dented the earning power of Americans. The surge in living costs has dented the earning power of Americans.
Average weekly wages, after adjusting for inflation, fell by 0.9% in June - the biggest monthly decline in 24 years, the Department said.Average weekly wages, after adjusting for inflation, fell by 0.9% in June - the biggest monthly decline in 24 years, the Department said.