(Bloomberg) – Monty Bennett hasn’t seen anything quite like today’s stubbornly low inflation in his long career as a hotelier.
Occupancy at the Ashford Group of Companies’ 143 properties is at all-time highs, yet Bennett still finds it difficult to raise room prices as aggressively as he expected at this stage in the U.S. economic expansion.
“When we take rates up too much, we will see demand slacken; and that will cause us to push them back down,” said Bennett, the Dallas-based company’s founder and chief executive officer.
Bennett’s description of consumer businesses’ tentative pricing power these days is the Holy Grail that central bankers, including Federal Reserve Chair Janet Yellen, sought for decades.
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Now, though, in what might seem like a strange twist on conventional economics, she and her colleagues are raising interest rates while simultaneously trying to make clear to the public they don’t want inflation to hang around zero for too long. They reiterated their desire last week to see it climb to 2 percent after boosting borrowing costs for the first time since 2006.
The Fed has missed its goal for more than three-and-a-half years, and it doesn’t expect the pace of price gains to approach the target until the end of 2017. Central bankers also are missing inflation targets in Sweden, the euro area, U.K., Japan and even New Zealand, which pioneered the strategy of trying to deliver a specific rate.
Return to zero
Thirty years ago, any policy maker would have welcomed a run of inflation below 2 percent. But the less inflation there is, the lower central-bank rates will be, making a return trip to zero more likely. That would force officials to resort, once again, to unconventional tools such as bond-buying that can be politically unpopular and less effective in restoring jobs and growth.
“We’re not saying goodbye forever to the zero lower-bound and the problems that it causes,” former U.S. Treasury Secretary Lawrence Summers told Bloomberg on Dec. 15. “When we get to recession, we usually need 300 basis points or more of Fed easing, but there’s simply not going to be room for that.”
Fed officials stressed their commitment to their target last week, saying they need “actual and expected progress” on prices to keep pushing borrowing costs up. That’s a higher bar than in October, when policy makers said they only needed to be “reasonably confident” inflation would move back to 2 percent.
“We really need to monitor, over time, actual inflation performance to make sure that it is conforming” to the Fed’s forecast, Yellen told reporters on Wednesday after raising the benchmark federal funds rate from near zero.
The Fed’s preferred inflation gauge, the personal consumption expenditures price index, rose 0.2 percent for the year ending October. Minus energy prices, which are depressing the overall index, and food, the measure rose 1.3 percent.
The Fed sees the extended rout in energy prices eventually hitting bottom, according to the statement after last week’s meeting. Policy makers also said labor someday will be scarce enough that workers can bargain wages higher and have more pocket money to spend, allowing executives such as Bennett to raise prices.
It’s a forecast and a gamble. Just how and when wages translate into higher prices is a process that isn’t well understood. And there could be more shocks — another rise in the dollar or continued weakness in oil prices — that depress inflation for a longer period.
A target-miss extending out five or six more years could erode confidence that inflation ever will return to 2 percent, undermining the Fed’s credibility. This would make its work even harder.