Fed's Kohn: Economy Still Bigger Worry Than Inflation

A top Federal Reserve official said Tuesday that the danger the U.S. economy will weaken further is a bigger worry than higher inflation, and the central bank has tools and is ready to do what it needs to respond to "difficult times."

Donald Kohn

"I do not expect the recent elevated inflation rates to persist," Fed Vice Chairman Donald Kohn said in a speech at the University of North Carolina at Wilmington.

"In my view, the adverse dynamics of the financial markets and the economy have presented the greater threat to economic welfare in the United States."

The recovery in shaky financial markets is likely to take time, and the correction in the beleaguered housing sector has further to go, Kohn said.

Although he expects recovery after a sluggish period, policy-makers must take into account the possibility of "very unfavorable developments," he added.

"We have the tools," Kohn said. "As Chairman Bernanke often emphasizes: We will do what is needed."

Kohn's remarks came after the government reported that inflation at the wholesale level jumped 1 percent in January on rising energy costs and posted the biggest 12-month gain in more than 26 years.

Core producer prices, which strip out volatile energy and food costs, climbed a greater-than-forecast 0.4 percent, the sharpest increase since February, the Labor Department said.

Analysts polled by Reuters were expecting prices paid at the farm and factory gate to rise 0.4 percent overall and 0.2 percent when food and energy were excluded.

Producer prices were up 7.4 percent from January of last year, the steepest climb since October 1981, the Labor Department said.

In the report, the Labor Department said energy prices rose 1.5 percent in January and were up 22.6 percent over 12 months.

Gasoline prices gained 2.9 percent in the month and soared 48.1 percent over the year.

Reflecting higher commodities prices, finished consumer foods rose 1.7 percent in January, the steepest gain since a matching increase in October 2004.