Federal Reserve chairman Mr Alan Greenspan said US companies are regaining the power to raise prices and that a long period of worry about deflation is over, fanning market worries about rate rises.
"It's fairly apparent that pricing power is gradually being restored and, as I'll indicate tomorrow, threats of deflation, which were a significant concern last year, by all indications, are no longer an issue for us," Mr Greenspan told the US Senate Banking Committee last night.
Treasury bond prices and stocks sank on Mr Greenspan's words, as traders saw them as raising the chances of a near-term increase in interest rates from 1958 lows of 1 per cent.
Mr Greenspan said deflation concerns had evaporated in the last few weeks and called this a "long overdue and most welcome change" in the economic outlook.
Deflation, in which prices spiral downward, is a stubborn phenomenon rare in US economic history that was last seen during the Great Depression of the 1930s.
Mr Greenspan did not specifically say risks of inflation and deflation were balanced, though analysts increasingly expect Fed officials to reach that conclusion at their next policy session on May 4th.
He said the US economy has weathered multiple shocks well in recent years, helped by 13 Fed interest-rate cuts. Mr Greenspan indicated policy-makers were ready to do whatever was necessary to keep expansion on track.
"The news is good," Mr Greenspan said.
"If you look out at the alternatives as to various different economic scenarios that could have emerged out of the extraordinary events subsequent to 9/11 and corporate scandals and wars in Afghanistan and Iraq, we're doing rather well," he said, "And I think the question is, how do we manage that in a way that we will continue to do well?"