US inflation data deteriorates further as recession risk rises

Fears that US policymakers could be caught in an "inflation trap" heightened yesterday, as the American government released inflation figures that were much worse than had been expected at the same time as the former US Federal Reserve chairman Alan Greenspan said the chances of a full-blown recession had risen.

Stocks fell on Wall Street as analysts worried that the accelerating pace of price increases would prevent the Fed from lowering interest rates to combat distressed financial markets, a housing slump and a rapidly cooling economy. The Dow Jones index ended 1.3 per cent lower at 13,339.9.

US consumer prices surged 0.8 per cent in Nov-ember, the Government said, the largest one-month gain in the headline consumer price index since September 2005. On an annualised basis, the rise was 4.3 per cent, the highest since June 2006.

The inflation data follow Thursday's news that factory gate inflation accelerated to 3.2 per cent in November alone, and will reinforce the Federal Reserve's concern that inflation remains a risk to the economy.

Several economists now believe that the various inflation figures explain the Fed's decision to lower its benchmark interest rate by only a quarter point this week, rather than the half point widely called for. Fed officials cited "uncertainty surrounding the outlook" for both growth and inflation as the grounds for their caution.

Traders duly pared their expectations of a quarter-point Fed rate cut at the next meeting on 30 January. According to futures prices on the Chicago Board of Trade, the chances of a reduction to 4 per cent slipped to 84 per cent, from 96 per cent yesterday.

Mr Greenspan is the latest figure to highlight the risk of a US recession, saying yesterday economic growth was "getting close to stall speed", and implying the chances of a recession were now more than the 50/50 he put them at a few weeks ago, let alone the 30 per cent chance he offered as his best guess earlier this year.

"The odds are clearly rising," Mr Greenspan said. "We are far more vulnerable at levels where growth is so slow than we would be otherwise. If somebody has an immune system that is not working very well, they are subject to all sorts of diseases. The economy at this level of growth is subject to all sorts of potential shocks."

Martin Feldstein, head of the National Bureau of Economic Research, which is responsible for dating US economic cycles, and the former Treasury secretary Lawrence Summers are among those also raising the prospect of a sharp downturn.

David Resler, chief economist at Nomura in New York, said: "There is no question inflation is going to remain a concern for policymakers this certainly will give some policymakers pause about the advisability and desirability of further rate cuts."