Gold surged nearly 4% yesterday (Wednesday), as the U.S. Federal Reserve appears hesitant to raise lending rates despite signs of severely escalating inflation.

The price of gold jumped $30.30 to trade at $915 an ounce as of 11:45 a.m. EDT, its highest level since May.

“The Fed said that inflation is a major concern, but they’re not going to do anything about it, which made gold go ballistic,” Leonard Kaplan, the president of Prospector Asset Management, told Bloomberg News. “The dollar is going to get slammed again.”

After meeting yesterday, the Federal Open Market Committee acknowledged inflation as a growing problem, but also expressed its belief that an economic downturn would eventually blunt demand for goods and drive down prices.

“The committee expects inflation to moderate later this year and next year,” the FOMC said in a statement.

While the Fed is content to sit back and measure the stimulative effect of its previously mandated 2% interest rate, Jean-Claude Trichet, president of the European Central Bank, is telegraphing a rate hike that will do even more damage to the U.S. dollar.

The dollar, which fell to $1.5743 against the euro in morning trading, will likely sink further after the central bank’s Governing Council meets July 3, as the body is largely expected to raise its interest rate a quarter of a point to 4.25%.

“The Governing Council remains particularly concerned that current elevated inflation rates, which have proved higher than and more persistent than previously foreseen, may become entrenched in private inflation expectations and lead to second-round effects,” Trichet told an economic committee of the European Parliament.

Even a slight rate increase will significantly widen the gap between the euro and the dollar, and further elevate commodities prices. Oil was up more than $4, or 3%, by midday, trading at $138 a barrel.

One of the many investors to voice concern over mounting inflationary pressures is Warren Buffett, chairman of Omaha-based Berhshire Hathaway Inc. (BRK.A, BRK.B).

“I think inflation is really picking up,” Buffett told CNBC earlier this week. “We see it everyplace. It’s exploding.”

Of course, many analysts believe the situation is out of Fed Chairman Ben S. Bernanke’s hands at this point, contending that if he does raise rates to combat inflation, he will forfeit what little economic growth remains to be seen in the U.S. economy.

“In an environment of dislocated funding markets, a rate cut would not produce a recovery but a rate hike could trigger recession,” wrote Tullett Prebon economist Lena Komileva.

Source: Gold Soars to One-Month High as Bernanke and Buffett Square Off on the Economy