US Federal Reserve chairman Ben Bernanke has said the inflation outlook for the country is "highly uncertain".
And he said that rising prices, coupled with the effects of the credit crunch, had given the US economy a battering.
Mr Bernanke, speaking to a Kansas City Federal Reserve Bank conference in Jackson Hole, Wyoming, said Fed policy makers had to preserve price stability.
US prices rose by 5.6% in the year to July, the fastest inflation rate since 1991, recent figures showed.
Inflation watch
Mr Bernanke told delegates at the high-profile economics conference that there had been "some improved functioning in some markets".
However, he said that "the financial storm that reached gale force" around this time last year "has not yet subsided, and its effects on the broader economy are becoming apparent in the form of softening economic activity and rising unemployment".
There were some positives though, as Mr Bernanke pointed out that declines in commodity prices and stability in the dollar were encouraging signs.
The Fed, he said, would monitor the situation closely and "act as necessary" to make sure that inflation did not get out of hand.
Meanwhile, in a television interview investment guru Warren Buffett gave a boost to the market when he said that stocks are "more attractive" than a year ago.
Regulation
Much of Mr Bernanke's speech addressed the need for the US financial system to be more resilient to future economic shocks.
He suggested that regulators in future should assess the health of the entire financial system, rather than the condition of individual banks, Wall Street investment firms or other financial companies - as is the case at present.
"Such an approach would appear well justified as our financial system has become less bank-centred," he said.
"Some caution is in order, however, as this more comprehensive approach would be technically demanding and possibly very costly both for the regulators and the firms they supervise," he added.
The statement came amid renewed concerns over the financial health of Fannie Mae and Freddie Mac, which own or back more than half of all US mortgages.
Their share prices have fallen this week amid new rumours that the pair are to be the subject of a government bailout.
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