Capitol Report: Fed’s Brainard says there has been a ‘material’ drop in inflation that remains unexplained http://ift.tt/1U2UR7d

Bloomberg

Fed Governor Lael Brainard

The U.S. central bank is struggling to understand a “material” decline in the trend of inflation and so far the most common explanations seem off base, Federal Reserve Governor Lael Brainard said Thursday.

“We have seen a reduction in the underlying trend rate of inflation that is material,” and the cause remains “a bit of an open question,” Brainard said during a discussion at the Peterson Institute for International Economics.

In the U.S., inflation has stayed below the central bank’s 2% annual target since 2012 even as the unemployment rate has fallen from 8% to just over 4%.

Brainard said she didn’t think the relationship between a tight supply of workers and other resources and subsequent price increases—known in the profession as the Phillips Curve —is broken, but said the relationship “is not very important in the overall inflation process.”

Read: Bernanke proposes Fed adopt ‘temporary’ price-level targeting to combat next recession

Brainard said she didn’t think the decline was due to temporary or global factors either. Many analysts and other Fed officials, have suggested such forces are the cause of low prices.

Temporary factors don’t fully account for the subdued inflation because these factors have alternated between boosting and holding down price pressures, Brainard said.

And, “I don’t think [global factors] in itself, explains what is going on in the inflation process domestically,” Brainard added.

Fed officials are debating whether or not to raise interest rates despite the low inflation rate.

The minutes of the Fed’s September meeting showed that many officials do not want to raise interest rates until they are confident inflation is moving higher.

Read: December rate hike might not be automatic, minutes of last month’s meeting show