MercoPress. South Atlantic News Agency

Fed warns about US inflation and housing slowdown

Federal Reserve chairman Ben Bernanke said Wednesday inflation in United Sates is still too high and anticipated a substantial correction in the housing market.

Inflation is "above what we would consider price stability", Bernanke told the Washington-based Economics Club.

"We do believe that inflation is going to be coming down gradually over time'' he said adding that "it's something that we have to watch very carefully to make sure that it doesn't rise or even remain where it is''.

Further on he said that the housing market correction would continue to dent growth, "there is currently a substantial correction going on in the housing market'' and pointed out that the decline in residential housing construction is one of the ''major drags that is causing the economy to slow''.

The Fed chairman estimated the current housing slowdown could wipe around one percentage point US growth in the second half of 2006. US growth has slowed to 2.6% a year, from 5.6% in the first quarter of 2006

In his address to the club focusing on long-term trends in the US economy, Mr Bernanke warned that entitlement schemes - including Medicare and Social Security - needed to be significantly overhauled.

Such programs were under-funded - and if not reformed - could create significant fiscal burdens for future generations.

Figures released earlier on Wednesday highlighted a slowdown in the services sector, a driver behind the economy. According to the Institute for Supply Management (ISM), the non-manufacturing index fell to its lowest level since April 2003, albeit still indicating growth.

The services sector covers everything from shops and restaurants to airlines and banks, and accounts for 80% of US economic activity.

Inflation has remained strong, rising 2.5% for the 12-month period ending August 31 which is above Bernanke's "comfort zone" of a 1 to 2 percent rise in the personal consumption expenditures price index minus food and energy.