US fears further rate rise as higher rents fuel inflation

Wall Street was braced last night for the 17th successive increase in interest rates after the latest figures from the United States showed higher rents and energy bills pushing inflation above 4% last month.

The core measure of the cost of living in the world's biggest economy - which strips out food and energy - rose by 0.3% for the third month in a row, a worse outcome than dealers had expected.

The new chairman of the Federal Reserve, Ben Bernanke, has stressed in recent weeks that the central bank is concerned about mounting inflationary pressures, and markets believe the cost of borrowing will rise by 0.25 points to 5.25% at the end of this month - and may rise again by a similar amount at the Federal Reserve's August meeting.

Economists said a key factor behind the inflation increase in recent months has been rising rents, which are increasing at their fastest rate for more than 15 years. The boom in house prices and the increase in interest rates from 1% to 5% has made buying a house less affordable, pushing up demand for rented property.

But Stephen Cecchetti, professor of international economics and finance at Brandeis University, said rents were not the only trouble spot - prices rose in excess of 5% for 40% of the items in the core consumer basket.

"The increase is quite broad-based," he said.

Paul Ashworth, US economist at Capital Economics, said core annual inflation -currently 2.4% - was likely to hit 3% by the end of the year.

"None the less, we still believe that signs of a sharp slowdown in the real economy will prevent rates rising any higher than 5.5%, particularly now that the markets are coming round to the idea that slower growth and not inflation is the number one risk," he said.

There were also hints yesterday that more moderate expansion could be in prospect for China, the other mainstay of global growth.

The State Council in Beijing expressed concern about rapid credit growth, high fixed-asset investment growth and structural imbalances in the Chinese economy, reinforcing similar comments from the country's central bank, the People's Bank of China.