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ollie plimsolls

Markets Dive As Fed Raises Stagflation Fears

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Ben Bernanke, the chairman of the US Federal Reserve, has painted a gloomy picture of slowing growth and rising inflation, causing a sharp sell-off on Wall Street as investors sniff a nasty whiff of stagflation.

Ben Bernanke: Markets dive as Bernanke raises stagflation fears

Ben Bernanke cut his 2007 growth forecast from an upper ceiling of 3pc to 2.5pc

The Dow dived 134 points to 13,836 after the start of his annual Humphrey-Hawkins testimony to Congress, and the dollar fell sharply against the euro, yen and sterling. The dollar closed three quarters of a cent lower against the pound at $2.0522 in London.

Mr Bernanke said inflation was now running at 4.4pc 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.

He insisted core inflation was a "better gauge" of underlying trends, an argument meeting growing scepticism in Congress.

Critics say the controversial measure - expected to run at 2pc to 2.25pc this year - strips out a big part of household costs by omitting food and energy. While it may be a useful indicator during brief shocks, it is questionable when steady global growth is pushing up all commodity prices. There is mounting evidence that it lags headline inflation by a few months.

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