Gains in PPI do not necessarily feed through into retail price increases, as measured by the Consumer Price Index, the Fed president told reporters after addressing a conference on European and American models for growth.
"There is not a lot of correlation," she said. "While I continue to stay alert and aware of whether I see an increase in inflationary pressures, I don't see them at this time."
"Business people I talk to continue to say they continue to see some rising input costs. But they are not able to fully translate these rising input costs into their own prices," she told reporters when asked about the jump in PPI.
In her speech, she also said that inflation expectations are holding around 2.5 percent for the United States, even though the CPI rose 3.3 percent in 2004. Moreover, the inflation premium built into bond prices is low and she does not see excessive risk taking in bond markets.
Analysts said her calm words indicate the Fed is willing to wait a few more months before deciding whether to alter its gradualist path of rate tightening. The Fed has pushed up rates by a quarter percentage point at each of its last six meetings to reach 2.5 percent from a low 1 percent in June 2004.
"There is nothing scary out there yet" to make them accelerate that pace, said Ken Wattret, chief eurozone economist at BNP Paribas in London.
"I don't think there will be any sign of panic from the Fed from one month's PPI. So that will be some comfort to the US bond market," he said.
The US Treasury market was closed for the President's Day holiday. But European debt markets were on a firmer footing after Friday's strong sell-off, which was sparked partly by the PPI surprise. The 10-year benchmark Bund was down one basis point at 3.67 percent in early afternoon trade.
Pianalto, who currently debates US monetary policy in the Fed's rate setting committee, but is not a voting member until next year, also said that the US economy is growing steadily without showing signs of slowing.
US business people remained confident and bankers saw an increase in commercial lending. "I believe that the US economy is on a sustained economic growth path," she said.
Pianalto also said that the Fed has a good track record on bringing down inflation, without setting an inflation target. The merits of adopting a set target have become a hot topic at the Fed ahead of Chairman Alan Greenspan's retirement next year. It was discussed at its last policy meeting.
"We have been fairly successful without setting targets," Pianalto said without commenting on where she stood on the overall debate.
Supporters argue a specific target would help to cement the Fed's inflation-fighting credibility and provide policy continuity and predictability.
But others say it is an unneeded straitjacket.
Pianalto stressed the overall importance of central bank credibility in fighting inflation, regardless of the tools they use to achieve that goal.
"While maintaining a long-term focus on price stability, central banks can differ on the short-term tactics," she said.
In her speech, she also downplayed concern that high government deficits would crowd out consumer and business investment and force up interest rates, adjusted for inflation.
"Despite what popular commentary might suggest, there is no need for deficits to be inflationary. The prospect of inflation arises only if a central bank tries to resist a rise in real interest rates, thereby keeping its policy rates too low and inadvertently easing monetary policy," she said.
The US government is running an increasingly large US deficit while the Federal Reserve in the past seven months has been steadily raising interest rates.