U.S. Federal Reserve Chairman Ben Bernanke said on Tuesday the U.S. economy faced significant risks to growth, while dismal data flashed fresh signs of stagflation.

In its semi-annual monetary policy report to Congress, the Fed raised its projection for growth in 2008, but this provided cold comfort to investors caught in financial market turmoil and consumers facing job losses and soaring energy prices.

Economists are also likely to attribute the Fed's rosier growth outlook largely as a result of government economic stimulus checks, which many consumers have already spent.

"The possibility of higher energy prices, tighter credit conditions, and a still-deeper contraction in housing markets all represent significant downside risks to the outlook for growth," Bernanke said in remarks to the Senate Banking Committee.

Worringly, he also said risks of faster inflation had intensified on the back of the rising prices of energy and other commodities. For details see

Data released on Tuesday showed troubling signs for inflation coupled with slow economic growth.

Total sales at U.S. retailers rose a less-than-expected 0.1 percent in June, as auto sales posted their biggest drop in more than two years, a Commerce Department report showed.

Also on Tuesday, General Motors said it would cut employment costs, sell assets and borrow at least $2 billion (1 billion pounds) to bolster its finances in the face of plummeting sales.

The Labor Department said producer prices over the last 12 months jumped 9.2 percent, the biggest increase since a 10.4 percent gain in June 1981 when the United States was last mired in a low-growth, high-inflation period known as stagflation.

A regional manufacturing survey showed factory activity in New York contracted for the fifth time in six months and data in the report suggested producers were passing on higher prices to consumers, which could add further fuel to inflation.

"The PPI number is just outrageous," said T.J. Marta, fixed-income strategist at RBC Capital Markets in New York.

On Wall Street, U.S. stocks tumbled 2 percent, adding to losses after Bernanke's comments.

The dollar also fell further. U.S. government bonds which generally benefit in times of economic weakness, added to earlier gains.

The Fed raised its projection for growth in 2008 to a range of 1 percent to 1.6 percent from a 0.3 percent to 1.2 percent range it forecast in April on expectations for stronger consumer spending.

Separately, General Motors said it would cut white-collar employment costs by 20 percent, sell up to $4 billion of assets, and borrow at least $2 billion in a bid to shore up its cash to survive a deep industry slump.

CHECKS ALREADY CASHED

Economists had expected government tax rebate checks to boost June retail sales more, despite the weak economy, but much of that seems to have been reflected in May's gains.

Economists polled by Reuters had forecast total retail sales to rise 0.4 percent in June after a 0.8 percent gain in May that was initially reported as a 1.0 percent rise.

Excluding autos, retail sales rose 0.8, which was also below the pre-report consensus of 1.0 percent. Excluding autos, building supplies and gasoline, retail sales rose 0.4 percent.

U.S. producer prices rose a far larger-than-expected 1.8 percent on the month in June as energy costs soared. If there was any good news on inflation, it was that core prices at the producer level, which exclude food and energy, edged up just 0.2 percent.