By Ann Saphir
Nov 13 (Reuters) - San Francisco Federal Reserve President Mary Daly said on Friday that her "bias" is that the central bank will need to increase its policy rate, particularly with services inflation moving in the wrong direction and some signs of inflation persistence.
"We're going to need to, in all likelihood, raise rates; I will deliberate this with my colleagues in December at our meeting and in all future meetings and make the collective decision that we judge is most appropriate
for the economy that is evolving," Daly said at a University of Nevada, Las Vegas Center for Business and Economic Research forecast event. "Producers are telling us more and more that they're running out of room to take it out of margins, and they really want to consider passing along this to consumers. So that's the inflationary impulse we want to avoid."
The core consumer price index, which excludes volatile food and energy prices, has risen about 0.3% month over month in each of the last three months. That's far higher than the 0.2% or less that would be consistent with year-over-year inflation at 2%, the Fed's target.
Daly, like several other policymakers, said she's particularly concerned that services inflation excluding housing is "not moving in the correct direction," which is particularly troubling because that slice of inflation tends to be sticky.
"That's a place where you might think a retailer, or a professional business, if they have to buy more expensive IT goods, pay higher energy bills and have other inputs that are rising in price, maybe they're going to pass that along to customers," she said.
The Fed raised its policy rate in September but held it steady in October, and financial markets are betting heavily on quarter-point interest-rate hikes at each of the Fed's December 8-9 and January 26-27 meetings. Daly said she feels markets understand how the Fed sets rates in response to economic conditions, without remarking specifically on the timing of coming rate hikes.
Daly said she is also paying close attention to consumer spending, which accounts for most of the US economy, as the December meeting approaches.
"Consumer spending remains just surprisingly resilient; you just haven't seen a pullback, so I think that's the piece of information that I'm really looking for in the next one to two to three months: what happens in that, especially around the holiday season, do we see consumers giving up or do we see them keeping going even if prices rise?" Daly said.
"Sitting here in Las Vegas...we're just starting to hear that the consumer may be running out of gas. And we're hearing that now in other states, not just Nevada."
(Reporting by Ann Saphir, Editing by Franklin Paul and Andrea Ricci )
