U.S. inflation remains sluggish, and that is presenting a problem

WASHINGTON — The United States has a problem: not enough inflation.

That notion is a bit of a head-scratcher. Most people don’t like inflation. They would prefer that a dollar tomorrow be worth the same as a dollar today.

But a recent drop in inflation may be a sign of fresh economic weakness and is perplexing to Federal Reserve officials who are wrapping up the central bank’s stimulus campaign.

The Federal Reserve thinks modest inflation has important economic benefits, and it has aimed since 2012 to keep prices rising at an annual pace of 2 percent. The problem is that the Fed is on track to fail for the sixth straight year. Inflation has been stubbornly sluggish.

A little inflation can brighten the economic mood, causing wages and corporate profits to rise more quickly.

Economists like to point out that this is an illusion. If everyone is making more money, then no one can buy more stuff. Prices just go up. But the evidence suggests people enjoy the illusion and, importantly, they respond to the illusion by behaving in ways that increase actual economic growth, for example by working harder.

The Fed’s chairwoman, Janet Yellen, told Congress this month that she expects inflation to rebound. But she said the Fed could change course if weakness persists, by, for example, not moving forward with additional interest rate increases.

“It’s premature to reach the judgment that we’re not on the path to 2 percent inflation over the next couple of years,” Yellen said. “We’re watching this very closely and stand ready to adjust our policy if it appears the inflation undershoot will be persistent.”

The Fed’s policymaking committee will meet Tuesday and Wednesday but it is expected to defer major decisions until later in the year.

Analysts expect the Fed to announce in September that it will start to reduce its holdings of Treasurys and mortgage bonds. The Fed is expected to leave its benchmark interest rate unchanged at least until December.

“If you see inflation running below target persistently, for so long, it’s really hard to get around the idea that, despite everything, monetary policy has actually not delivered sufficient accommodation,” said Peter Ireland, an economist at Boston College. “It’s a reason not to clamor for additional rate hikes on top of what we’ve already seen.”

Most Fed officials, however, continue to predict that inflation is around the corner.