CHARLOTTE, NC, Dec 21: Richmond Federal Reserve Bank President Jeffrey Lacker said on Thursday US growth should pick up gradually next year and warned the main threat to this benign outlook was higher inflation.

“The risk that core inflation surges again, or does not subside as desired, clearly remains the predominant macroeconomic policy risk,” he told the Charlotte Chamber of Commerce in a lunchtime speech.

Lacker has dissented in the last four policy meetings of the US central bank’s policy-setting committee, voting against its decision to leave interest rates on hold at 5.25 per cent. He preferred another quarter point hike to keep price pressures at bay.

Lacker is not a voter in 2007, but remains hawkish.

“Many forecasters have been saying core inflation will moderate in the near term, and this would be desirable. But such a moderation is not yet evident, despite the two most recent CPI (consumer price index) reports,” Lacker said.

Core inflation, which strips out volatile food and energy prices, was unchanged in November but advanced at a 2.6pc pace compared with the same month in 2005.

“The longer core inflation persists above 2 per cent, the greater the danger of inflation becoming entrenched at too high a rate,” Lacker said, referring to the core PCE (personal consumption expenditures index), the Fed's preferred measure of prices.

He forecast growth picking up slowly next year as the drag from the cooler housing market fades, provided it does not weaken again. He said growth should rise to around three per cent by the end of 2007 and average between 2.5 and 2.75 per cent over the year as a whole.

In any case, strength from consumer spending should offset the impact of slower housing and fears of a downturn in overall growth seem misplaced, he said.

“The weakness in housing will continue to be a drag on overall economic activity, into the first half of next year...But I seriously doubt it will be enough of a drag to tip the economy into recession,” Lacker said.—Reuters