Quelling inflation is a “top priority” for the US Federal Reserve, its Chairman emphasised yesterday after official figures unexpectedly revealed the sharpest jump in American price pressures for 26 years.

Ben Bernanke moved to bolster the Fed's inflation-fighting credibility in financial markets after the startling data showed that soaring fuel and food prices triggered a 1.1 per cent leap in US consumer prices in June alone, marking the steepest monthly gain since June 1982.

The surge in price propelled the headline US inflation to a heady 5 per cent, its highest level since 1991.

Mr Bernanke responded yesterday by reassuring Congress that curbing inflation remained the Fed's main goal, even amid conflicting pressures from the deepening US downturn, worsening financial turmoil, and rising American joblessness.

“Inflation is too high, and it's a top priority of the Federal Reserve to run a policy that is going to bring inflation to an acceptable level consistent with price stability,” he told the US House of Representatives Financial Services Committee.

His comments came as the Fed's new emphasis on combating inflation was further underlined as it emerged that its top officials believed that its next move was likely to be to raise US interest rates. Minutes showed that the June 24 and 25 meeting of the Fed's rate-setting Open Market Committee (FOMC) concluded: “With increased upside risks to inflation and inflation expectations, members believed that the next change in the stance could well be an increase [in rates].

The dollar rebounded from Tuesday's record lows as Mr Bernanke combined his own emphasis on the Fed's determination to rein-in inflation by again brandishing the threat that Washington could intervene to halt the slide in the US currency.

In a new signal of growing concern at the Fed that the dollar's rapid decline on foreign exchanges is stoking inflationary pressures by driving up America's import bills, Mr Bernanke fired a fresh warning at the markets, making clear that currency intervention remains a weapon at the disposal of the US central bank and Treasury.

“Market intervention is a policy that's been undertaken a few times. I think it's something that should be done only rarely, but there may be conditions in which markets are disorderly where some temporary action is justified,” he said.

The Fed chief's comments reinforced a ground-breaking move last month when he delivered his first significant public remarks on the dollar, normally the territory of the US Treasury in an apparent attempt to call a halt to its heavy losses. Then, he made clear that “we are attentive to the implications of the changes in the value of the dollar for inflation”. He said that the currency's slide had “contributed to the unwelcome rise in import prices and consumer price inflation”.

Yesterday's news of the June surge in US inflation combined with news that private investors shunned American assets during May, triggering a rare net outflow of investment capital from the United States, to pile further pressure on the dollar.

The developments raised the spectre of a vicious circle taking hold in which rising inflation makes US assets less appealing to investors, hitting inflows of “hot money” into America, and so further undermining the dollar, and further inflaming inflationary pressures.

Official figures showed that there was an overall net outflow of £2.5 billion (£1.25 billion) in capital from US markets in May, compared with a $61.6 billion inflow in April.

Despite the increased threat from the Fed of rate increases, it is unlikely to be in any hurry to tighten policy, as Mr Bernanke also made clear that it remains alert to America's growing economic plight.

“This is clearly a tough time,” he said. “Conditions are tough on average families.” Those pressures were emphasised yesterday as other figures showed Americans' real weekly earnings, after inflation tumbled by 0.9 per cent last month.

Fannie and Freddie will not fail, says Fed chief

— Fannie Mae and Freddie Mac, the crisis-hit US mortgage lending groups, are in no danger of failing, the US Federal Reserve's Chairman told Congress yesterday.

— Ben Bernanke tried to strengthen reassurances over the future of the two key players in America's slumping housing market that he and Henry Paulson, the US Treasury Secretary, gave on Tuesday.

— The two troubled lending companies, which own or guarantee half of America's mortgage debts, worth more than $5 trillion, were adequately capitalised, the Fed chief said.

— His comments came as congressional Democrats and the Bush Administration were scrambling to shore-up support for a far-reaching housing market rescue Bill as Republican backing for it began to ebb away. Many congressional Republicans were balking at the US Treasury aim to add to the Bill measures to prop up Freddie Mac and Fannie Mae.

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