Consumer prices rose 2.7% in March from a year ago,
presenting a quandary for Federal Reserve officials who say their mission is to
keep the inflation rate lower.
The Fed has been predicting since the 2008 crisis that
immense economic slack—in the form of unemployed workers, vacant homes and idle
factories— would hold inflation down because it would make it more difficult
for firms to raise prices or workers to win wage increases. But inflation has
repeatedly moved above the Fed's expectations during the recovery.
Fed officials have said they would consider another round of
bond-buying, known as quantitative easing, to bring down long-term interest
rates if the recovery falters. They continue to expect inflation to slow
because of underused resources such as idled plants. But if it remains above
2%, it could make the Fed less willing to do any more to boost economic growth.
.
The Labor Department reported Friday its consumer price
index rose 0.3% in March from February and has advanced at a 3.7% annual rate
in the past three months after slowing late last year. Rising energy prices
were a primary factor, with gasoline costs up 9% in March from a year earlier.
Inflation has slowed from higher levels—as the Fed predicted last year—and
other measures of inflation are a bit tamer. For example, the Fed's preferred
yardstick, the Commerce Department's personal consumption expenditure price
index, was up 2.3% in February from a year earlier. Moreover, measures that
exclude food and energy are lower.
The Fed says its goal is to keep inflation at 2% in the long
run. It has predicted consumer prices would settle at or below that rate during
much of the economic recovery. In January, for instance, officials forecast
inflation between 1.4% and 1.8% by year's end. They will update that forecast
at their next policy meeting April 24-25. The low-inflation expectation also
underpins their decision to hold short-term interest rates near zero for years
to come.
In recent years, Fed officials have largely seen jumps in
gasoline prices as temporary. They correctly predicted last year that oil and
other commodities prices would settle down after jumping in early 2011. But
inflation's recent return above 2% has reignited a broader debate inside the
central bank about whether factors other than short-term bursts of energy costs
might be at play.
Some officials argue that there isn't as much slack in the
economy as is commonly believed, and thus inflation pressures have been
stronger than expected. The recession and financial crisis, this group of
officials argues, left structural problems in some markets that are creating
price pressures.
Housing is one example. Millions of homes remain unoccupied
five years after the housing bust, representing a large stock of unused
capacity that should be putting substantial downward pressure on housing costs.
But many people have opted to rent where supply is tight, in part because of
under-building of rentals during the home-ownership boom.
Associated Estates Realty Corp., a 53-property apartment
owner based in Richmond Heights, Ohio, has a 97% occupancy rate. "There
hasn't been a lot of new product built in the last four or five years, and we
have more renters coming into the pool," said Jeffrey Friedman, the
company's chief executive. The firm expects to raise rents 4% to 5% this year
to an average rate of about $1,000 a month.
Nationwide, rental costs were up 2.5% from a year earlier in
March, the Labor Department said Friday. A wing of inflation-wary officials at
the Fed see this kind of example as a reason to worry the Fed's policies are
fanning inflation pressures.
"The economy has experienced both a reduction in the
demand for goods and damage to its productive capacity," Narayana
Kocherlakota, president of the Minneapolis Fed, said in a speech in Minnesota
this week. "It does not appear that demand is significantly below the
productive capacity of the United States." Because of that, inflation
hasn't receded as much as the Fed forecast, he argues.
.
Wal-Mart is still expanding in China, despite higher food
prices and rising labor costs. The WSJ's Deborah Kan and Laurie Burkitt speak
to Wal-Mart Asia CEO Scott Price.
.
Many others in the central bank, including the Fed's most
powerful decision makers, disagree with Mr. Kocherlakota, who declined to
comment for this story. These officials believe there is still a great deal of
spare capacity in the economy which will hold inflation down despite temporary
spikes. High unemployment—at 8.2% in March, well above its long-run average of
less than 6%—is their key piece of evidence.
"There is still slack in the U.S. economy, and this is
really the important thing to focus on," New York Fed President William
Dudley told students at Syracuse University Friday. Because of that, he said he
expects inflation to fall below 2% by next year.
He added that new efforts by the Fed to spur growth would
"absolutely" be considered if the economy shows signs of faltering
and inflation remains well-behaved. His camp of officials argues that inflation
is not falling more in part because consumers and businesses have become
conditioned by 30 years of inflation stability to expect prices to move
predictably.
During the 1970s, oil-price jumps spurred inflation fears,
prompting workers to demand higher wages and companies to raise prices in
anticipation. Today, in contrast, top Fed officials believe that stable-price
expectations have prevented such anticipatory moves, meaning inflation doesn't
rise by very much.
Fed researchers have been wrestling with this question, too.
Fed staff at the central bank's last policy meeting in March revised downward
their estimates of the economy's potential output, a slight nod to the
Kocherlakota argument.
But the revisions were small and the staff argued to
officials that there still are lots of underused assets holding back inflation,
minutes of the Fed's March meeting show.
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