NEW YORK — A top Federal Reserve official expressed concern Tuesday about inflation in the U.S. and warned the central bank may have to raise rates soon to keep price pressures under control.

“To prevent recent inflation from continuing to plague the economy and to avoid a rise in inflation expectations, I believe the current very accommodative stance of monetary policy will need to be reversed,” Federal Reserve Bank of Philadelphia President Charles Plosser said. “Depending on how economic conditions evolve, I anticipate that this reversal will likely need to begin sooner rather than later,” he said.

“To keep inflation expectations anchored means that monetary policymakers will have to back up their words with action,” the official added.

Plosser is currently a voting member of the interest rate setting Federal Open Market Committee, and his comments came from a speech prepared for delivery before the Philadelphia Business Journal Book of Lists Power Breakfast, in Philadelphia.

His comments arrive at a time where central bankers are struggling to contain inflation amid economic growth that has remained stubbornly weak, as financial markets have stumbled from one bout of trouble to the next. Most observers reckon the Fed is being boxed in by this mix of conditions, and as a result, it will maintain its current overnight target rate of 2% for the remainder of the year.

Plosser’s comments about the economy expressed a considerable amount of concern about inflation, although he showed less worry about the state of growth.

“We must be attentive to both growth and inflation in a consistent and systematic way, and as we are all aware, inflation has been rising,” Plosser said.

But he added “inflation is already too high and inconsistent with our goal of — and responsibility to ensure — price stability. Rates hikes “will likely need to begin before either the labor market or the financial markets have completely turned around,” Plosser said.

The official’s outlook on growth has undergone modest changes. “My own outlook for the rest of this year is for continued sluggish growth and weakness in labor markets,” with the U.S. gross domestic product likely rising by 1.7%.

“This is a somewhat better picture than just a few months ago,” Plosser said. But he added, “I still expect sluggish economic growth in the second half of this year and a further increase in the unemployment rate.”

Plosser said he expects the central bank’s preferred inflation gauge, the personal consumption expenditures index, to remain at a rise of 4% this year, reflective of energy price increases. He reckons the core PCE price index — it’s stripped of food and energy costs — will rise by 2.5%. That’s above the Fed’s perceived comfort range.

Plosser added “as energy and other commodity prices level off, I expect both measures of inflation to be lower — in the 2 to 2 1/4% range by the end of next year,” at least as long as Fed acts to make that happen.

Despite Plosser’s inflationary concerns, he argued the U.S. is not seeing a replay of the conditions seen in the 1970s, when the U.S. suffered from stagflation, a mix of low growth and persistent price pressures.

“I want to emphasize that what we have been seeing in the economy this past year, and in my own outlook going forward, is very different from the 1970s, because I see the Fed as committed to keeping inflation expectations well-anchored,” Plosser said.

The official also said the central bank’s preference for looking at prices stripped of food and energy factors may need to change. “Since energy price increases have been so persistent in recent years, I do believe more attention should now be paid to measures of headline inflation in setting monetary policy,” Plosser said.

By Michael S. Derby
Of DOW JONES NEWSWIRES