Inflation to ebb but risks remain: Bernanke

By Mark Felsenthal

WASHINGTON (Reuters) - The economy is set to grow at a sluggish pace in coming months but there are risks that elevated levels of inflation excluding food and energy may not recede, Federal Reserve Chairman Ben Bernanke said on Tuesday.

"Although core inflation seems likely to moderate gradually over time, the risks to this forecast remain to the upside," Bernanke said in remarks prepared for delivery to a monetary policy conference in Cape Town, South Africa.

The text of his speech was made available in Washington. Bernanke delivered his remarks by satellite.

Weakness in the housing sector is likely to restrain economic growth for longer than expected, Bernanke said.

"The adjustment in the housing sector is still ongoing, and the slowdown in residential construction now appears likely to remain a drag on economic growth for somewhat longer than previously expected," he said.

Core inflation is "somewhat elevated" but ebbing, Bernanke said, noting that while oil and gas prices have risen, energy costs overall are still lower than at peak levels in 2006.

In the meantime, the rate of increase in housing costs, which had contributed to a rise in core inflation, seems likely to slow, although the timing of that deceleration is uncertain, Bernanke said.

However, the tight labor market has the potential to contribute to price pressures, the U.S. central bank chairman said.

"The continuing high rate of resource utilization suggests that the level of final demand may still be high relative to the underlying productive capacity of the economy," Bernanke said.