Slower growth, rising prices slam economy

WASHINGTON — The country slogged through slower economic growth and rising prices during the summer, packing a double whammy to people and businesses alike.

The Fed's new snapshot of business conditions, released Wednesday, also underscored the challenges confronting Federal Reserve Chairman Ben Bernanke and his colleagues as they try to get the economy back on track.

For now, many economists predict the Fed will probably leave a key interest rate alone when it meets next on Aug. 5 — given all the economic crosscurrents. Boosting rates to fend off inflation would hurt the fragile economy and the already crippled housing market. On the other hand, the Fed isn't inclined to lower rates because that would aggravate inflation.

The report "supports our notion that the Fed is firmly stuck on the horns" of a policy dilemma, said T.J. Marta, a fixed-income strategist at RBC Capital Markets.

Growth and inflation barometers turned worse in the summer, according to the Fed report. Some worry that the country may be headed for a bout of stagflation, that toxic combination of stagnant growth and stubborn inflation not seen in decades.

Bernanke has said, however, that he doesn't believe the economy will suffer from stagflation. That said, the report is consistent with the economic assessment Bernanke gave to Congress last week.

"It was decidedly downbeat, " Joel Naroff, president of Naroff Economic Advisors, said of the report. "The economy remains in trouble."

Information from the Fed's 12 regional banks around the country suggested that "the pace of economic activity slowed somewhat," the Fed reported.

Consumer spending — the economy's lifeblood — was reported as "sluggish or slowing" in nearly all the Fed regions, although the government's tax rebate checks spurred sales for some items, especially electronics. Sales at many other stores, particularly for housing-related goods, were typically characterized as "weak or falling," however.

Looking ahead, "the outlook for retail activity was also generally downbeat," the Fed report said.

Auto sales, meanwhile, were characterized as "almost uniformly weak" across all Fed regions. Sales were dismal for gas-guzzling SUVs, trucks and some minivans.

Wall Street, however, appeared unfazed by the Fed report. The Dow Jones industrials were up in afternoon trading.

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