Long run of low U.S. inflation not unusual, Fed paper finds

Public fretting by some U.S. central bankers over excessively low inflation aside, the current bout of sub-par U.S. inflation isn't that unusual and will likely be cured as employment rises, according to a study published Monday by the San Francisco Federal Reserve Bank.

U.S. inflation has lingered below the Fed's 2-percent target for more than three years, and policymakers such as Chicago Fed President Charles Evans have pointed to that shortfall as reason to hold short-term borrowing costs near zero until well into next year.

Keeping interest rates low, he and others have argued, is the central bank's best hope for pulling inflation up.

At the same time, other Fed policymakers say that modest economic growth and a decline in unemployment will eventually boost inflation anyway, a view that is bolstered by the new paper.

"(T)his lengthy undershooting (in inflation) does not yet signal a statistically significant departure from the target after accounting for the ever-present volatility of monthly inflation readings," wrote San Francisco Fed research advisor Kevin Lansing in the regional Fed bank's latest Economic Letter.

"An economic forecast that predicts more-positive (or less-negative) gaps in production or employment over time would also predict an increase in the 12-month inflation rate."

The research comes as policymakers get ready for a policy-setting meeting next week. While they are not expected to lift rates then, some economists do expect policymakers to put financial markets on notice that recent economic data may be strong enough to allow rate hikes by September.

San Francisco Fed President John Williams said as much last week, when he noted that a September rate hike would be "plausible."

St. Louis Fed President James Bullard went further earlier Monday, when he told Fox Business Network he sees better than even odds that his colleagues will approve a rate hike in September.