Richmond Federal Reserve Bank President Jeffrey Lacker said that while "core" inflation has fluctuated, there's no sign yet that it's headed lower.
"Given the repeated swings we've seen, it is difficult to pick out a definite trend, and in fact no statistically significant moderating trend has emerged yet," Lacker told an audience Wednesday at Frederick Community College.
Lacker's comments echoed what he said two weeks ago in an exclusive interview with CNBC's Steve Liesman
Lacker, who does not have a vote this year on the Fed's interest-rate setting panel, said that the rise in unit labor costs--a gauge of the labor costs associated with any given unit of production--had been consistent with the rise in inflation seen recently.
He said that if labor costs continued to rise at recent rates, either inflation will keep pace or those costs will be taken out of company profits.
Profit Margins Key
However, if profit margins remain high, inflation is unlikely to recede much, the Richmond Fed chief said.
"If the markup remains relatively high and unit labor costs continue to advance at or above 2%, then we are likely to see inflation continue at about 2%," Lacker said.
Lacker's comments come three weeks ahead of the Fed's next meeting on interest rates. The central bank is widely expected to hold benchmark overnight borrowing costs steady at 5.25%, where they have been since June 2006.
Fed officials say keeping borrowing costs at that level is the best way to bring down core inflation, where volatile food and energy costs are stripped out, without tipping the economy into recession.
"The central question ... regarding the outlook for inflation is whether core inflation will 'moderate' to an acceptable rate in coming quarters," Lacker said.
Inflation Target of 2%
He said that if investors continue to expect Fed policymakers are on track to bring inflation down, core inflation should ease to around 2%.
"As long as policy actions appear to be plausibly consistent with movement toward 2% inflation and nothing else acts to alter inflation expectations, that's likely to be the best forecast for where inflation is headed," he said.
Any reduction in inflation below 2% would be "temporary and hard to sustain" unless there is also a drop in inflation expectations, he added.
Lacker said he expects economic growth to be sluggish for the first half of the year but return to trend growth rates by the end of 2007.
It is difficult to say whether the downturn in housing markets has reached bottom, Lacker said. But hefty inventories of unsold homes are likely to hold construction spending down for several months to come, he added.