Prices go up and prices go down. At the Federal Reserve, a bigger worry now is that they stay the same.

U.S. central bankers are betting the economy is near an inflection point where demand is strong enough to create more jobs, eventually nudging both wages and prices higher. A report Friday showed payrolls in the past three months rose the most in 17 years while wages showed the biggest gains since 2008, reinforcing views the threshold is close.

That should help meet Fed Chair Janet Yellen’s requirement for officials to be “reasonably confident” inflation is heading higher before raising interest rates this year.

The nagging problem that’s making them “nervous,” says St. Louis Fed President James Bullard: the longer inflation stays below the Fed’s 2 percent target — as it has for 32 months — the higher the risk that it remains stuck in a low range.

Economists call the phenomenon “inflation persistence,” a condition where prices are slow to move from prevailing levels. It’s dangerous because it threatens to shake public faith in the Fed’s ability to meet its goals. That in turn can erode the central bank’s power to shape expectations for the future, a key policy tool.

Read the Full Article: Source – Bloomberg

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