RTTNews - Philadelphia Federal Reserve Bank President Charles Plosser warned Thursday that inflation poses a more serious risk than many in the United States anticipate.
He also forecast inflation of about 1.2 percent this year, rising to 2.5 percent by 2011.
In remarks to a marketing group in New York, Plosser said the so-called output gap - the difference between actual and potential economic output 0 is difficult to measure. He said the gap was severely overestimated in the 1970s, leading to runaway inflation soon thereafter.
Plosser said recessions shock the potential output level.
The large adverse productivity shock to financial intermediation means that equilibrium output and estimates of potential output are now lower, so the output gap is not likely to be as big as standard estimates suggest, he said.
If that occurs, he added, the economy may be at greater risk of inflation than the conventional wisdom indicates.
Plosser said his inflation predictions take into account steps by the Federal Reserve to keep inflation in check. He added that the Fed could do more to keep inflation down, and said the Fed should set a specific inflation target.
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