Bernanke: Sustained oil price rise danger to US economy

Federal Reserve chairman Ben Bernanke Mr Bernanke said although overall inflation is low, commodity prices have risen since the summer

The length of time that oil prices remain high will be significant for the US economy, US Federal Reserve chairman Ben Bernanke has said.

He told the Senate Banking Committee that the most likely outcome was a temporary and modest rise in inflation.

But he warned that a prolonged rise in oil prices would pose a danger to economic growth in the US.

Mr Bernanke said he believed the US economy would continue to grow in 2011, but unemployment would remain high.

Monitoring developments

"The most likely outcome is that the recent rise in commodity prices will lead to, at most, a temporary and relatively modest increase in US consumer price inflation," Mr Bernanke said.

"That said, sustained rises in the prices of oil and other commodities would represent a threat both to economic growth and to overall price stability, particularly if they were to cause inflation expectations to become less well anchored.

"We will continue to monitor these developments closely and are prepared to respond as necessary to best support the ongoing recovery in a context of price stability."

US stocks fell as investors focused on the more dangerous scenario mentioned by My Bernanke, with the Dow Jones, the S&P 500 and the Nasdaq all falling by more than 1%.

Mr Bernanke also cited rising food prices and weak home prices as other factors that could prompt US consumers to spend less.

He added that the US still needed the support of the Fed's second quantitative easing programme, known as QE2, under which it has pledged to pump $600bn (£368bn) into the economy to help boost demand.

Data from the Commerce Department on Monday showed that US consumer spending rose by only 0.2% in January, below analysts' forecasts of a 0.4% rise.

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