Bernanke sees modest inflation

The U.S. Federal Reserve chairman, Ben Bernanke, told Congress Tuesday he expects temporary and modest price increases ahead, not runaway inflation.

Even as Bernanke made his comments, commodity prices continued their advance with gold reaching a record high. Oil rose more than two dollars and cotton soared.

April crude soared $2.66 to close at $99.63 US a barrel on the New York Mercantile Exchange. April Brent — the European and Asian benchmark — gained $3.67 to $115.47 US a barrel on the ICE Futures Europe exchange in London.

Oil prices have risen by five per cent in February and by 25 per cent over the last 12 months.

Gold for April delivery closed up $21.30 to $1,431.20 US an ounce in New York as traders looked to an alternative investment as the U.S. dollar traded lower and amid fears that the continuing turmoil in Libya will spread across the region. In electronic trading later, it rose to a record $1,433.40.

And May cotton rose seven cents, or 3.7 per cent to $1.9823 US a pound in New York amid worries that supplies might not keep pace with demand from China, the world's biggest consumer.

Cotton has more than doubled in price over the past year, to 150-year highs.

Bernanke, in testimony to the senate banking committee, said a prolonged rise in oil prices would pose a danger to the economy, and that the Fed is closely monitoring the situation.

The Fed chairman said the central bank will continue with its $600 billion bond-purchase program, downplaying runaway inflation risks that others have raised.

The bond-purchase program is scheduled to end in June. It is intended to spur more spending and invigorate the economy by lowering rates on loans and boosting prices on stocks.

Republicans in Congress and some Fed officials worry that the program could trigger high inflation and a wave of speculative buying on Wall Street that could lead to new bubbles in the prices of assets like stocks and bonds.

Bernanke once again defended the program. He said it is needed to energize growth and reduce unemployment. He blamed the rise in oil and global commodities prices on strong demand from fast-growing countries such as China, not the Fed's stimulus policy.

Political upheaval in the Middle East, Bernanke said, has caused oil and gasoline prices to march higher. However, Bernanke said he and a majority of his Fed colleagues continue to believe that the situation won't lead to out of control inflation.

Workers have little power to demand big pay increases because the jobs market is still weak. Many factories and other companies are operating well below full capacity because customer demand is far from booming.

Those forces will prevent inflation from taking off, Bernanke said.

Bernanke repeated his belief that it will still take "several years" for U.S. unemployment to drop back to normal levels of around six per cent. "Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established," he said.