Bernanke says weak economy not at risk of inflation

Federal Reserve Chairman Ben Bernanke, in a response to a lawmaker's questions made public on Tuesday, said the U.S. economy is operating so far beneath its potential that inflation is unlikely to become a problem.

The letter to Senator Jim Bunning, a Republican from Kentucky, comes as Bernanke faces Senate confirmation for a second term as Fed chairman.

In a confirmation hearing before the Senate Banking Committee earlier this month, Bernanke came under fire both for failing to prevent the financial crisis and for overextending the central bank in an attempt to ease the banking sector's strains.

Bernanke, in a written response received by Bunning's office on Monday, said high unemployment and idle factory capacity made it unlikely that inflation would post a rapid increase any time soon.

The bulk of the evidence indicates that resource slack is now substantial, Bernanke wrote. His response was posted on Bunning's website.

I continue to expect slack resources, together with the stability of inflation expectations, to contribute to the maintenance of low inflation in the period ahead, he said.

His comments come as the latest figures on producer prices outside the volatile food and energy sectors, published by the Labor Department on Tuesday, showed a surprising 0.5 percent spike, prompting a sell-off in both stocks and government bonds on inflation fears.

Asked about market gyrations, Bernanke argued in the letter that the recent rise in gold prices, which have surged to record highs above $1,200 an ounce, were not a sign of increasing inflation expectations.

He also said he saw no sign of a bubble in the U.S. stock market, which has rallied over 60 percent from its March lows.

The U.S. Senate Banking Committee will vote on the nomination of Bernanke to a second four-year term as head of the U.S. central bank on Thursday at 9:30 a.m. (1430 GMT), the panel said on Tuesday. If the committee approves Bernanke, his nomination will be considered by the full Senate.

(Additional reporting by Tim Ahmman, Neil Stempleman; Editing by Leslie Adler)