By Howard Schneider and Ann Saphir

WASHINGTON (Reuters) – If high inflation continues through the end of the year the Fed may have to adopt “a more aggressive policy response” to control it, Federal Reserve Governor Christopher Waller said in remarks on Tuesday outlining the case for why Fed officials may have misdiagnosed the current pace of price increases as temporary.

Waller said he too still believes the economy has seen the worst of the current coronavirus wave, that labor and other supply shortages will ease over time, and that “the escalation of inflation will be transitory…I still see supply and demand working here to moderate price increases so that inflation moves back toward 2%,” the Fed’s established target.

That would mean any change in the Federal Reserve’s key policy interest rate “is still some time off.”

But Waller said he feels the risks are shifting, and he is now “greatly concerned” the current fast rise in prices may continue.

The consumer price index has risen at a more than 5% annual rate for four months in a row, a run not seen since 1990.

“The next several months are critical for assessing whether the high inflation numbers we have seen are transitory,” Waller said in remarks prepared for delivery at the Stanford Institute for Economic Policy Research. “If monthly prints of inflation continue to run high through the remainder of this year, a more aggressive policy response than just tapering may well be warranted in 2022.”

“Tapering” refers to the Fed’s evolving plan to scale back its $120 billion in monthly bond purchases as a precursor to any interest rate increase, a process Waller says should begin after the Fed’s upcoming November meeting.

The tapering is expected to be completed by the middle of next year.

Fed officials are currently divided between those who feel a rate increase will be needed next year and those who see “liftoff” coming later.

Waller cautioned that one common argument — that current inflation is not of concern because it is driven by outsized and likely one-time increases in things like used auto prices — may miss the point. If large “one time” price increases rotate among enough goods, it could push overall inflation higher than desired.

“Firms are reporting that they have more pricing power now than they have had in many years, as consumers seem to be accepting higher prices,” he said. “One needs to be careful when selectively ignoring data series — be it used car prices, food and energy prices, or household surveys of inflation expectations…One should exhibit caution in dismissing data as outliers.”