Mr. Plosser said some of the decline in core inflation — which excludes food and energy — during the spring, to 1.9% by the Fed’s preferred measure, was "transitory." Nonetheless, he said, “I can’t see core in the latter half of 2007 being much more than a little over 2%."

As reported by the Wall Street Journal

Our objective is to achieve enduring price stability. And in particular we want to make sure that inflation remains under good control in the medium run.

There are several elements of that. One is that I think it's important to recognize that the month-to-month inflation numbers are very noisy. And so, a couple of good numbers does not, by itself, meant that the problem is solved and gone away.  So part of it is just simply seeing more data and getting a greater sense of assurance that the trend is really in the direction we'd like to see it.  The other is that as long as there's some very important risks out there to inflation, there's the possibility that inflation, even if it's a bit -- if it's come down some, there's a possibility that it will go back up in the future.

And the risks that I talked about in my testimony include high resource utilization, the fact that the economy is working at a very tight use of resources; and secondly, the fact that energy and food prices have raised headline inflation. Those prices might feed through into core inflation. They might raise inflation expectations.  So what we need to see is enough confidence that the risks have subsided so that we can feel confident that, in the medium term, inflation will be well-controlled.

In response to a question from Senator Bunning in the Q&A session

Turning to monetary policy, I hope I've made it clear that—based on what we know now—I think the current stance of policy is likely to foster sustainable growth with a gradual ebbing of inflationary pressures. It has been heartening to see core consumer inflation edging down in recent months. However, as the most recent statement noted, "a sustained moderation in inflation pressures has yet to be convincingly demonstrated." Moreover, upside risks to inflation continue to be present, given the possibility that labor markets are somewhat tight. I believe it is important to be particularly attentive to these risks not only because price stability is desirable in its own right, but also because a credible commitment to keeping inflation low and stable is necessary to ensure that inflation expectations remain well-anchored. At the same time, we must be careful not to pose unnecessary risks to continued expansion.

Recently in the United States, the Federal Reserve's Federal Open Market Committee has described our core rate of inflation as being uncomfortably high and has stressed the importance of further moderation in inflation. 

``We still have a ways to go before we get to the level of inflation that I'm comfortable with on a longer-term basis,'' Moskow said in an interview today on CNBC television. ``Inflation is the predominant risk that I see in the economy.''

As reported by Bloomberg News

Right now our policy rate ... is moderately restrictive. Not severely, but modestly so. And that allows for the economy to continue to grow ... and slowly, hopefully, bring down the inflation rates for CPI, the core CPI, to levels even closer to 2 percent as we move forward.

As reported by Reuters

[A]lthough core inflation seems likely to moderate gradually over time, the risks to this forecast remain to the upside.  In particular, the continuing high rate of resource utilization suggests that the level of final demand may still be high relative to the underlying productive capacity of the economy.

A variety of expectations measures then, point to expectations for core PCE inflation of about 2 percent right now. What does this imply about the outlook for actual inflation, which is now running at about 2¼ percent? The current level of inflation expectations is likely to exert a gravitational pull on actual inflation, if monetary policy actions are not inconsistent with those expectations and no concerted effort is made to shift expectations...

Could inflation fall below 2 percent, say to 1½ percent? That depends. Without a prompt fall in inflation expectations, a reduction in inflation below 2 percent is likely to be temporary and hard to sustain. With expectations left alone, the remaining mechanism for bringing down inflation is the traditional Phillips curve mechanism, that is, an increase in real interest rates that slows aggregate demand and reduces both inflation and real activity...

The prospects for bringing inflation down below 2 percent thus hinge on the extent to which a reduction in inflation expectations can be brought about. How difficult would that be? Using changes in the target interest rate alone, the process is likely to be difficult and time-consuming...

One natural approach to bringing inflation expectations down more expeditiously, should that be the desire, would be a strategy of clear communications about policymakers' intentions.

Given my estimate of the current level of long-run inflation expectations as well as the likelihood of some easing of resource pressures in labor and product markets, I expect that core inflation will slow to around 2 percent over the next couple of years.    

My forecast of a gradual slowing in inflation reflects my view that making further progress in lowering inflation is desirable. Although I expect that core inflation will drift down, I recognize that achieving further reductions in inflation may take time. In the near term, the recent rebound in prices for gasoline and other petroleum-based goods is likely to put upward pressure on the costs of many non-energy goods and services.

More fundamentally, I believe that long-run inflation expectations remain a key determinant of the path of inflation. But what are the current expectations for long-term inflation? Unfortunately, that is not an easy question to answer. The results from the Survey of Professional Forecasters, readings on household opinion such as the Reuters/Michigan survey, and the spread between standard Treasury securities and Treasury inflation-protected securities--taken together--suggest that long-term inflation expectations are currently around 2 percent, although this guess is far from certain.

Given my estimate of the current level of long-run inflation expectations as well as the likelihood of some easing of resource pressures in labor and product markets, I expect that core inflation will slow to around 2 percent over the next couple of years. Although I believe that inflation expectations will play a primary role in determining the course of inflation, I want to emphasize that neither economists nor policymakers understand the expectations-formation process very well.

We expect to end 2008 with an unemployment rate only somewhat higher than it is now.  Core inflation should gradually come down, moving closer to the levels I view as being consistent with price stability.  

``The inflation rate is higher than what I would like to see,'' Mishkin said in response to a question following a speech today in Bridgewater, Virginia. While it's likely that price gains will moderate, he warned that ``if we don't see that happening, we would have to do something about it.'' 

From audience Q&A, as reported by Bloomberg News

"The inflation rate is higher than what I would like to see," Mishkin said in response to a question following a speech today in Bridgewater, Virginia.  While it's likely that price gains will moderate, he warned that "if we don't see that happening, we would have to do something about it."

As reported by Bloomberg News

I prefer inflation to be between 1 and 2 percent—that's the range that I consider to be most compatible with the Fed's goal of price stability. The monthly inflation numbers did come in lower toward the end of the year, and I was pleased to see the improvement. But the most recent couple of readings on inflation have been higher. So clearly, it is much too early to say that inflation is no longer a concern.