MercoPress. South Atlantic News Agency

Inflation-scare in the US.

Consumer prices in the United States surged 0,6% in May, the highest in three years, however the Bush administration and analysts were quick to point out that excluding volatile energy and food the index was really 0,2%.

"I'm pleased with the fact our economy is strong and becoming stronger. Indicators show that the economic stimuli we put in action is working", remarked President Bush who faces a tough re-election battle next November.

According to the latest data, US inflation could reach 7,2% in 2004 but the core value, stripped off energy and food indicates 2,4%. In the last twelve months annual inflation reached 3,1%, the biggest rise since June 2001, but without volatile energy and food drops to 1,7%.

The rise in inflation has made it clear the Federal Reserve will be increasing interest rates from its basic 1%, the lowest since 1958, at the end of June when the Open Market Committee meets.

The discussion is now centred in how large a rise (a quarter or an "aggressive" half a point), but Fed Chairman Alan Greenspan has repeatedly insisted it will be gradual.

Speaking before the Senate Banking Committee Mr. Greenspan said there was little likelihood that inflation would flare up and require aggressive short term rate rises, they would "very likely to be measured over the quarters ahead".

Mr. Greenspan described as a "fairly strong recovery" the current performance of the US economy.

But the market was not so upbeat about future US inflation. A Merrill Lynch poll indicated most financial managers believe inflation will be higher than forecasted and some expect Fed interest rates to rise anywhere from 4 to 5% by the end of 2005. Actually with the current inflation tendency, basic interest rate "should be closer to 3% than 1%".

Steve Stanley form RBS Greenwich speaking to CNN Money said, "Fed emphasizes how important price stability is for a benign inflation perspective. And in this scenery, June looks worrisome".