Core inflation in the United States is likely to hold below a 2 percent annual rate through the end of 2008, according to a senior vice president of the San Francisco Federal Reserve Bank.

We anticipate that core inflation will fall and remain below 2 percent this year and next, economist Glenn Rudebusch said in the bank's latest FedViews.

The outlook is a shift from June's forecast, which showed 2 percent as a floor to the core personal consumption expenditures price index through the end of 2008.

Core prices strip out volatile food and energy costs.

Since then, the year-on-year core PCE for May, the most recent data available, was reported at a 1.9 percent annual rate after holding 2 percent since 2004.

Rudebusch said the latest jump in oil prices above $70 per barrel has the potential to boost headline inflation, as it did in 2004 and 2005.

However, we anticipate little pass-through to other prices and, hence, to core inflation, he said.

U.S. economic growth should remain slightly below trend at about 2.5 percent for the second half of 2007 and into 2008, Rudebusch said.

This forecast assumes that the housing market will start to recover after a few quarters. Specifically, we anticipate that residential construction will continue to contract through early next year but then slowly turn around, he said.

Still, Rudebusch mulled prospects for housing conditions to get worse, not better.

A further significant drop in home sales with an associated decline in home prices could see households cut back on spending, he said. Such a deepening housing slump with associated large spillovers to consumption poses a significant risk to the outlook.

Rudebusch said the recent rise in mortgage interest rates and short-term rates used to set adjustable mortgages could also depress housing demand.

Still, for the broader economy, long-term interest rates, which returned only to last year's level, seem unlikely to be a substantial restraint on overall economic growth, he said.

Inflation