Has Danger to U.S. Economy 'Diminished'? Federal Reserve Chairman Ben Bernanke said Monday that the risk of the U.S. economy entering a substantial downturn "appears to have diminished," but he also signaled deepening concern over inflation. Here, a look at some key indicators of where the economy stands.
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Has Danger to U.S. Economy 'Diminished'?

Federal Reserve Chairman Ben Bernanke addresses the Federal Reserve Bank of Chicago's annual conference in May. Scott Olson/Getty Images hide caption

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Scott Olson/Getty Images

Federal Reserve Chairman Ben Bernanke addresses the Federal Reserve Bank of Chicago's annual conference in May.

Scott Olson/Getty Images

Federal Reserve Chairman Ben Bernanke said Monday that the risk of the U.S. economy entering a substantial downturn "appears to have diminished" over the past month. But he also sounded a warning over soaring energy costs and said the central bank would "strongly resist" any tendency for an inflationary psychology to take hold.

Bernanke's comments have led to expectations that the Fed may start raising interest rates to combat growing inflation. But they've also raised questions about the current health of the U.S. economy. Here, a look at some key indicators:

Bernanke's statement signaled deepening concern about inflation. What are the risks inflation poses?

In an inflationary environment, people's purchasing power is diminished, largely because salaries cannot keep pace with the cost of living. Those relying on fixed incomes, such as Social Security or pensions, are hit particularly hard.

A weak dollar translates into higher costs for imports and raw materials, especially energy. Some of those higher wholesale prices get passed on to consumers.

It also could cause further weakness in the job market, says Michele Gambera, chief economist for Ibbotson Associates, a division of Morningstar. Lately the dollar seems to have "plateaued," he says. He predicts that interest rates in the U.S. may start to rise "sooner rather than later," in an effort by the Federal Reserve to strengthen the dollar.

Where do things stand with inflation?

Bernanke said inflation "remained high, largely reflecting sharp increases in the prices of globally traded commodities" — a result, in part, of increased demand from emerging markets for energy, grains and other raw materials. Rising energy prices have also "added to the upside risks to inflation and inflation expectations," the Fed chair said.

Edwin M. Truman, a senior fellow at the Peterson Institute for International Economics, says the spike in inflation is one sign that it may be time for the Fed to step back from its low-interest-rate policy of the past several years. "In retrospect, it does look like the monetary policy was too easy, [for] too long — both in the U.S. and around the world. That's what's fueled the credit expansion, and that has fueled that growth in demand [that] is outstripping the growth in supply," says Truman.

How is unemployment affecting the U.S. economy?

Last week, the Labor Department reported a jump in the unemployment rate from 5 percent in April to 5.5 percent in May — the biggest month-to-month increase in two decades. Bernanke characterized this as an "unwelcome rise." But he noted that the economic outlook overall was in line with what the Fed had forecast.

What about the impact of oil prices?

"Oil price increases act like a tax on consumers," Truman says. Higher oil prices push up inflation — and that pushes down economic activity, since people have less money to spend on goods and services. Oil prices are currently at more than $130 a barrel.

So does that mean the economy is heading toward a recession or improving?

Higher unemployment and skyrocketing oil costs have spurred concerns that the economy might be taking a turn for the worse.

"The economy is not going into a deep depression, but you're not going to have a bounce back to multiple [fiscal] quarters of above 3 percent growth," Truman says.

With reporting by NPR staff. The Associated Press contributed to this report.