Americans still expect inflation to remain stable, making it unlikely that recent spikes in commodity costs will lead to runaway increases in prices, a top Federal Reserve official said on Friday.

Dennis Lockhart, president of the Atlanta Federal Reserve Bank, said he expects moderate economic growth to gradually bring down U.S. unemployment, which has come down rapidly in recent months but remains at an elevated 8.8 percent.

A mix of demand from rapidly growing emerging economies and fears of supply disruptions from a wave of pro-democracy protests in the Middle East and North Africa have driven up the price of oil and other commodities, sparking inflation fears.

U.S. crude is trading above $110 a barrel, and the average price of gasoline stands around $3.70 a gallon.

But Lockhart said he expected commodity prices to stabilize and have a minimal effect on underlying U.S. inflation trends, even if costly fuel did put a dent on household budgets.

With longer-term inflation expectations remaining stable -- and predicting that commodity price growth will stabilize -- my view is that current monetary policy is appropriate, Lockhart told the Knoxville Economics Club.

Lockhart has argued recently the Fed should complete its $600 billion bond-buying stimulus program as scheduled by the end of June, saying there has not been enough compelling evidence to warrant a reversal.

Historically, prices for industrial commodities have tended to exert a relatively small effect on most consumer prices, Lockhart said.

This is not to say there will be no pass-through effect on inflation. The point is the effect is likely to be muted.

In particular, he said there was little evidence of upward pressure on wages as the labor market continues to struggle.

The European Central Bank raised official interest rates on Wednesday in a move that many saw as the opening salvo for a cycle of tightening. Still, the Fed is unlikely to follow suit in the near-term, as it continues to promise to keep rates at very low levels for an extended period.

Lockhart said he did not see a major impact from the ECB's rate hike on the Fed's thinking. He said Fed officials were monitoring the European debt situation closely in the wake of Portugal's decision to request a eurozone bailout, but added that he does not expect major ripples for the United States.

CONFIDENCE-BUSTER

Lockhart said he remained worried about the housing sector, which has been showing signs of further deterioration in recent months. He said this slump was weighing on consumer confidence, countering some of the positive effects of an improving labor market outlook.

Lockhart credited a strong rebound in manufacturing for a good deal of the economic recovery's underlying strength.

Consumer confidence and spending have been weaker than many were expecting, he said. On the positive side, the labor market has improved in recent months, and the industrial activity data remain very strong.

Given the still-fragile nature of the recovery, Lockhart said Fed officials should avoid discussing their exit strategy in too great a detail, lest they send the wrong signal to the public and financial markets about the direction of rates.

In response to the deepest recession in generations, the Fed not only slashed interest rates to near zero but also committed to buy more than $2 trillion in government bonds and mortgage debt.

U.S. gross domestic product expanded 3.1 percent at an annual clip in the fourth quarter, not as strong a rebound as is normally seen after a steep downturn.

(Editing by Neil Stempleman)

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