How serious is the risk of inflation? It depends on which Fed governor you ask.
One speaking North Carolina Tuesday played it down. But another speaking elsewhere played it up.
Fed Vice Chairman Donald Kohn 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."
"I do not expect the recent elevated inflation rates to persist," he 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."
But another Fed governor, Dallas Federal Reserve President Richard Fisher, had a slightly different view. He said inflation is a growing source of worry and has begun to feed expectations of future price pressures.
"I'm more concerned about inflation than I have been of late. It's a growing concern. We see it particularly in commodities and energy products," Fisher told Public Broadcasting Service's Nightly Business Report. A transcript of his interview was made available on the Internet.
"The question is, will it feed into expectations of consumers and business women and men here in the United States? And I do have a concern that it's beginning to feed into expectations and that's something we worry about at the Federal Reserve," Fisher was quoted as saying.
Fisher, a voting member of the Fed's interest rate-setting committee this year, dissented against a half-point Fed rate cut on Jan. 30 in favor of leaving rates at 3.5 percent.
The Fed governors' 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.