US inflation rate at 26-year high

Record oil costs and petrol prices have caused problems worldwide

US inflation accelerated at the fastest rate in 26 years in June, fuelled higher by surging energy prices, official figures have shown.

Consumer prices rose by 1.1% in June, the Labor Department said, more than the 0.7% many analysts had expected.

Federal Reserve boss Ben Bernanke said on Tuesday that the threat of rising inflation had intensified recently.

High inflation will make it harder for the Fed to cut rates and boost an economy hurt by a housing market slump.

'Fed in a hole'

The Fed chairman, who faces his second day of congressional testimony on Wednesday, also warned about the "downside" risks to growth in the world's largest economy.

There is so much uncertainty in the market right now that news of higher inflation doesn't mean a rise in interest rates Stephen Malyon, Scotia Capital

Many analysts now believe that the central bank may have to leave borrowing costs on hold as it tries to steer a faltering economy through turbulent times.

"There is so much uncertainty in the market right now that news of higher inflation doesn't mean a rise in interest rates," said Stephen Malyon, analyst at Scotia Capital in Toronto.

The US faces a severe housing slump, a credit crunch and financial market turmoil stemming from the collapse of the sub-prime mortgage market.

The impact of surging living costs in June "really puts the Fed in a hole," said Alan Ruskin, an economist at RBS Greenwich.

Gary Thayer of Wachovia Securities agreed that the Fed was facing a tricky balancing act.

"This increases concern that the Fed is not going to be able to lower interest rates if the economy remains weak," he explained.

"And as long as the economy remains weak, it will be hard for the Fed to raise rates to fight inflation."

On annual basis, prices were 5% higher when compared with June 2007, the Labor Department said.

Energy surge

Energy prices were the main driver of price growth, and were 6.6% higher in June as the cost of petrol, natural gas and heating oil increased.

Expectations that that a slowing US economy will dampen demand for oil helped crude prices drop 42 cents to $138.32 in pre-market trade in New York.

The annual core inflation rate, which strips out volatile fuel and food prices, was 2.4%.

The surge in living costs has also dented the earning power of Americans.

Average weekly wages, after adjusting for inflation, fell by 0.9% in June - the biggest monthly decline in 24 years, the Department said.