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Mishkin says inflation will slide to 2 percent

US Federal Reserve Governor Frederic Mishkin, the newest member of the central bank's board, said US inflation was poised to recede only "gradually" given the recent rise in fuel and energy prices.

The Fed's most closely watched measure of inflation should slow to about 2 percent from the current 2.25 percent, Mishkin said during a speech in San Francisco. Moving it below that would be difficult without a shift in monetary policy, he added.

"This process may take a while in light of the recent rebound in prices for gasoline and other petroleum products," Mishkin said in a speech Friday at a conference organized by the San Francisco Fed.

"A substantial further decline in inflation would require a shift in expectations, and such a shift could be difficult and time-consuming to bring about," he said.

The Fed has been successful in anchoring consumers and companies' outlook for prices, which means the central bank doesn't have to respond as aggressively as it did in the late 1970s, Mishkin said. His speech, which was a largely academic study of inflation over the past four decades, didn't mention current prospects for economic growth or this week's interest-rate decision.

Inflation -- as determined by the personal consumption expenditures price index, minus food and energy has been at or above the top of the 1 percent to 2 percent comfort zone identified by Chairman Ben Bernanke for more than two years.

Mishkin said higher fuel charges will seep through to core prices because companies will gradually pass increased energy costs on to their customers.

Mishkin said 2 percent is a reasonable estimate of current long-run expectations for inflation.

Policy makers voted unanimously on March 21 to keep their benchmark interest rate at 5.25 percent, the level it's been at since June. In the accompanying statement, the Fed dropped its tilt toward higher borrowing costs, while strengthening its language on inflation, calling it the "predominant concern."

Central bankers should be careful not to be lulled into a false sense of comfort by contained inflation expectations, Mishkin said in his speech.

"If the monetary authorities were to become complacent and to think that they could get away with not reacting to shocks that, in their mistaken view, no longer have the potential to cause inflation to rise persistently, then inflation expectations would surely become unhinged again," he said.

"Inflation has become less persistent over the past two decades, but the underlying trend may not yet be perfectly stable," Mishkin said.
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