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.
