The drop in the US inflation rate since mid 2008 is not just a narrow indication of a housing market weakness, but a sign of a broad economic slack, according to several economists from the Federal Reserve Bank of San Francisco.
The result came as Fed policy-makers consider how much longer the short-term interest rates will be maintained near zero.
According to the monetary policy-setting of the Federal Open Market Committee, subdued inflation, along with several other factors like the high unemployment rate, warrant keeping rates exceptionally low for an “extended period”.
However, some top Fed officials have recently begun questioning whether the “extended period” language continues to be warranted, with the economy showing signs of recovery. Based on the government’s closely watched employment report, US employers created jobs in March at the fastest rate in three years.
As the debate over the accommodative policy by Fed gathers pace, the findings of the San Francisco Fed researchers could help blunt concerns that the sharp drop in housing prices may be covering inflationary trends that might otherwise spur change in the monetary policy.
“Some analysts have raised the question of whether the unprecedented declines in house values, which have been the hallmark of the recent recession, might be artificially dampening core inflation readings,” stated economists Stefano Eusepi, Bart Hobijn and Andrea Tambalotti.
“However, a close examination of recent inflation data shows that the weakness in housing costs is representative of a broad pattern of subdued price increases across most consumption goods and services and is not distorting the broad downward trend in core inflation measures," they added.
By calculating the personal consumption expenditures core price index, excluding the housing component, and comparing it to the index with the housing component intact, the economists found that while housing prices did drag on inflation, the effect was relatively small and were just one component of a broad-based drop in the inflationary pressures since the peak of the fiscal crisis.