MercoPress. South Atlantic News Agency

US spending on food and fuel rises as dollar looses ground

United States consumer spending rose more than expected in January, but much of the gain was down to rising prices. The Commerce Department said on Friday personal spending rose 0.4% last month, a bigger rise than economists were expecting.

However the report showed that a key gauge of inflation rose 0.4%, with shoppers spending more on food and fuel. Economists say there is a danger of "stagflation" in the US - a situation where the economy is not growing, accompanied by high inflation. But on Thursday, Federal Reserve chairman Ben Bernanke told US lawmakers that he did not expect a period of stagflation. Instead Mr Bernanke expects rising oil, metals and food prices to level out. He also hinted that the Fed was poised to cut interest rates below 3% if problems in the housing and credit markets threatened to push the US economy into negative growth. On Thursday, revised figures from the US Department of Commerce confirmed that US economic growth dropped sharply in the last three months of 2007 after spending on new housing collapsed. Also this week, Freddie Mac and Fannie Mae, which guarantee about 45% of US mortgages, both reported huge net losses for 2007, and warned of further bad news as the glut of unsold homes increases, house prices drop and mortgage defaults stack up. Saddled on these discouraging data the US dollar ended the week with a new low against the Euro for the fourth day in a row. At one point the dollar touched 1.5239 against the Euro as traders bet that US interest rates will be cut again after hints from US Fed chief Ben Bernanke. That would make holding dollars, and assets priced in dollars, less attractive for investors who would look elsewhere for better rates of return. There has also been a warning from the Federal Reserve chairman, Mr Bernanke, about the challenges the US central bank faces in tackling the threats of inflation and a cooling economy. The US dollar also sank against other currencies, tumbling to almost three-year lows against the Japanese yen. For the first time, a dollar now buys less than 105 yen.