Fed 'uncertain' about inflation

The Fed has warned rates may rise in future to contain inflation

The US Federal Reserve left interest rates on hold last month because of uncertainty about the future path of inflation, minutes of the meeting show.

"Participants did not yet see a downward trend in core inflation as definitively established," notes said.

While there had been some good news on the economy - such as strong growth, members of the group remained concerned about the outlook for inflation.

The news came hours after data showed a surprise sharp rise in US inflation.

"Incoming data had suggested some improvement in core inflation, and a further gradual decline was seen as the most likely outcome, fostered in part by the continued stability of inflation expectations.

"However, participants did not yet see a downtrend in core inflation as definitively established," the minutes stated.

Strong economy

Ahead of the January meeting reports had shown that the economy had grown faster than expected late in 2006, while increased consumer spending offset a housing market slowdown.

As a result the Federal Open Market Committee said it believed a combination of better-than-expected news on the economy and inflation suggested there were smaller risks to growth and improved prospects for core inflation.

The comments were mirrored in testimony given by Federal Reserve chief Ben Bernanke last week, when he told the Senate Banking Committee that inflation pressures may be "beginning to diminish".

However, the minutes came hours after official figures showed rising medical and food costs pushed consumer prices up by a larger than expected 0.2% in January.

Core inflation, which excludes food and energy, rose by 0.3% for the month.

Housing worries

Meanwhile, minutes of the Fed meeting also raised concerns about the slowdown in the US housing sector.

"The ongoing contraction in the housing sector and the potential for spillovers to other sectors remained notable downside risks to economic activity," notes of the meeting showed.

US rates have been held at 5.25% since August last year after 18 months of successive rises.

The Fed has previously hinted it may raise rates further if inflation remains strong as its ultimate aim is to slow the US economy and lower inflation, without business activity falling off so much that a recession begins.