Fed's Kohn says weak economy to keep inflation at bay

ST. LOUIS (Reuters) - High unemployment, tight credit, vacant homes and idle factories point to a tepid U.S. economic recovery in which core measures of inflation are likely to slow further, the Federal Reserve's No. 2 official said on Tuesday.

"I don't think a V-shaped recovery is the most likely outcome this time around," Fed Vice Chairman Donald Kohn told the National Association for Business Economics.

"I expect that, for a while, the risk of further declines in underlying rates of inflation will be greater than the risk of increases," he said.

Kohn said U.S. economic activity turned up in the third quarter as investors waded gingerly back into riskier waters and businesses began to restock depleted inventories. Recent news on housing has been encouraging, and housing starts should improve gradually in coming months, he added.

Because of weak labor markets, consumer spending, which accounts for about 70 percent of U.S. economic output, will remain muted, the Fed vice chairman said. Further, credit remains tight for many borrowers, both consumers as well as small and medium-sized businesses, he added.

"The financial headwinds are likely to abate slowly, restraining the economic recovery," he said.

(Reporting by Emily Kaiser, writing by Mark Felsenthal, Editing by Neil Stempleman)