Richmond Federal Reserve Bank President Jeffrey Lacker said there have been some good numbers in the latest inflation reports, but it's unclear whether there is a firm downward trend or if it is a temporary dip from falling energy prices.
"I am not quite sure if I've changed my mind of where inflation is going to be the first half of this year," he told reporters after a speech on the economic outlook.
Lacker is no longer a voting member of the policy-setting Federal Open Market Committee. However, last year he had dissented from the Fed's past four decisions to keep rates steady at 5.25%. He thought the benchmark federal funds rate should have been increased by 25 basis points to keep inflation contained.
"We've gotten some good core inflation numbers," Lacker said. Since the Fed's last meeting in December, economic reports have shown a moderation in underlying price pressures compared with earlier in 2006.
The interest-rate setting Federal Open Market Committee will meet again on Jan. 30 and 31. The policy makers are widely expected to hold rates steady for the fifth-straight meeting.
In his prepared remarks, Lacker cautioned that another surge upward in oil prices could pose a risk to the economy.
"We would find ourselves (facing) inflation pressures again, and that is the great risk," Lacker said.
Oil prices have fallen sharply since the beginning of the year. On Thursday, crude prices set a fresh 20-month low just below $50 a barrel.
According to Lacker, core inflation tends to follow oil prices with a two-to-three-month lag.
Lacker continues to say that the main policy risk to the U.S. economy is for inflation to surge again or not subside.
"The risk that core inflation surges again, or does not subside as desired, clearly remains the predominant macroeconomic policy risk," Lacker said in his speech to a risk management association.
Lacker said there are signs of a moderation in inflation, but it will take several months of data for it to become convincing evidence.
The Fed's generally preferred measure of inflation -- the core personal consumption xpenditures price index -- had fallen to 1.8% in November on a three-month average rate of change.
That would be in the Fed's supposed comfort range of around 1% to 2%, but Lacker said the data had often oscillated in the past.
Data on Thursday showed core consumer prices rose 2.6% in 2006.
Lacker reiterated he expected economic growth, as measured by gross domestic product, to head higher.
"Growth will start the year on the low side, but should be back to about 3% by the end of the year," and average between 2.5% and 2.7% in 2007, he said.
A tight labor market and solid wage growth would likely keep consumer spending strong, which along with business investment would continue to offset the drag from the housing market.
Two risks to the outlook would be a further deterioration in the housing market and "substantial uncertainty" surrounding oil prices, he said.
On the housing slump, he said there were signs that demand for housing has stabilized, and that it was unlikely to be enough of a drag to tip the economy into recession.
Excess inventory of homes for sale suggests home building will be below demand for several more months, but he expected housing starts to realign with sales around the middle of
2007.