Fed’s Clarida Watches a Price Gauge That Just Tied a Record Low

(Bloomberg) -- Along with his colleagues on the Federal Reserve Board, Vice Chairman Richard Clarida watches inflation expectations closely. One of his favorite indicators just headed south.

Preliminary data released Friday show that a gauge the University of Michigan compiles on the five-to-10-year inflation outlook slipped to 2.3 percent in February, matching the lowest on record. That’s notable because Clarida said in late November that the index was “within -- but I believe at the lower end of -- the range consistent with price stability.” It had been bouncing between 2.4 percent and 2.6 percent.

Slow inflation has been surprising Fed officials. They had expected price gains to slightly overshoot their 2 percent goal as low unemployment spurred companies to raise wages and prices. Instead, inflation moderated just below that target. The consumer price outlook is a key part of the puzzle, because economists have found that expectations are an increasingly important driver of actual price gains.

Chairman Jerome Powell said on Jan. 30 that he’ll monitor inflation closely as he gauges if and when another rate increase is appropriate. The central bank signaled last month that it will take a pause after increasing borrowing costs four times in 2018.

“I would want to see a need for further rate increases, and for me, a big part of that would be inflation,” Powell said at his post-meeting press conference. “It wouldn’t be the only thing, but it would certainly be important.”

To contact the reporter on this story: Jeanna Smialek in New York at jsmialek1@bloomberg.net

To contact the editors responsible for this story: Brendan Murray at brmurray@bloomberg.net, Randall Woods

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