Danger of "stagflation" in the US, looms large

US consumer spending rose more than expected in January, but much of the gain was down to rising prices.

The Commerce Department said personal spending rose 0.4% last month, a bigger rise than economists were expecting.

But the report showed that a key gauge of inflation rose 0.4%, with shoppers spending more on food and fuel.

Economists say there is a danger of "stagflation" in the US - a situation where the economy is not growing, accompanied by high inflation.

On Thursday, revised figures from the US Department of Commerce confirmed that US economic growth dropped sharply in the last three months of 2007 after spending on new housing collapsed.

Also this week, Freddie Mac and Fannie Mae, which guarantee about 45% of US mortgages, both reported huge net losses for 2007, and warned of further bad news as the glut of unsold homes increases, house prices drop and mortgage defaults stack up.

Analysts say it is crucial for consumer spending, which accounts for two thirds of US gross domestic product, to remain robust in order to prevent the economy from a recession.

But fears are growing that consumers are being squeezed too far.

"It is a weak picture of the consumer. Income growth, the raw material for spending, is fading." said Robert Brusca of FAO Economics.