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Fed: High energy, food prices keep economy weak

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WASHINGTON — The Federal Reserve says the economy remained "generally weak" heading into summer as rising costs for energy and food pounded consumers and forced some companies to push their own prices higher.

The Fed's new snapshot of business conditions, released Wednesday in Washington, underscored two big sore spots for the country: listless economic activity coupled with lofty energy and food prices. Those rising prices raise the risks of both spreading inflation and putting another drag on overall economic growth.

Chafing under price hikes, "consumer spending slowed ... as incomes were pinched by rising energy and food prices," the Fed said. Manufacturing activity, meanwhile, was "generally soft" and the housing market remained stuck in a rut.

Businesses also were hit by rising costs, especially for energy, metals, plastics, chemicals and food. Such reports were "widespread," the Fed said. To cope, manufacturers in several areas "noted some ability to pass along higher costs to customers" the Fed said. Retailers, however, reported "mixed results with respect to raising final goods prices," the Fed said.

Over the past week, Federal Reserve Chairman Ben Bernanke and his Fed colleagues have been sounding an ever-louder alarm against inflation. Given those concerns, Bernanke has signaled the Fed's rate-cutting campaign, started last September to bolster the weak economy, is probably over for now.

Many economists predict the Fed will leave its key rate at 2 percent, a four-year low, when it meets next, on June 24-25.

However, with inflation moving up on the Fed's list of concerns, Wall Street investors and others are now thinking the Fed might be forced to start boosting rates later this year to curb inflation. Raising rates too soon, though, could deal a set back to the already fragile economy.

It's a dicey situation for Fed policymakers.

The housing, credit and financial crises have badly bruised the economy and sharply slowed its growth. Consumers and businesses alike have hunkered down. Employers have cut jobs every month so far this year and the unemployment rate zoomed to 5.5 percent in May, from 5 percent in April — the largest one-month increase since 1986.

Bernanke, in a speech earlier this week, downplayed the big jump in the jobless rates, saying the danger that the economy has fallen into a "substantial downturn" appears to have waned over the past month or so.

The Fed's powerful doses of interest rate cuts, the government's $168 billion stimulus package, further progress in the repair of problems in financial and credit markets, a gradual ebbing of the drag from the deep housing slump and still solid demand from abroad for U.S. exports should help the economy over the remainder of this year, Bernanke predicted.

At the same time, Bernanke sent a fresh warning that the Fed will be on heightened alert against inflation dangers, especially any signs that investors, consumers and businesses think prices will keep going up and change their behavior in ways that will aggravate inflation.

The Fed "will strongly resist an erosion of longer-term inflation expectations, as an unanchoring of those expectations would be destabilizing for growth as well as for inflation," the Fed chief said Monday evening.