| SAN FRANCISCO, June 30
SAN FRANCISCO, June 30 Whether U.S. inflation
next year rises above or remains stuck below the Federal
Reserve's 2-percent target will depend in large part on how
easily the long-term unemployed find work, a study published on
Monday by the San Francisco Fed suggests.
As long as a strengthening economy means better job
prospects for all workers, even those who have been
unsuccessfully looking for six months or more, inflation looks
set to stay well below 2 percent all next year, the study shows.
But if those out of work for long periods stand little
chance of actually regaining jobs, demand for workers could rise
more quickly than the supply, and inflation could rise above 2
percent before the end of 2015, according to the study. Some
economists believe that workers unemployed for long periods may
have trouble landing jobs because their skills are eroding or
are otherwise scarred.
That is a scenario that some prominent economists, including
Alan Krueger, have increasingly embraced. But it has little
currency with most Fed policymakers, including Fed Chair Janet
Yellen in particular. Yellen believes that even the long-term
unemployed will be able to find jobs as employers step up
hiring, allowing companies to fill vacancies without putting too
much upward pressure on wages.
Forecasts published by the Fed show that most policymakers
expect to keep interest rates near zero until well into 2015,
allowing the unemployment rate to continue to fall even as
inflation stays muted.
The recent study uses a well-known economic model called the
Phillips curve to predict inflation under varying scenarios.
Most scenarios showed inflation lingering well below 2 percent
for all of 2015. But when the researchers excluded the long-term
unemployed from their model, they found that inflation could
breach 2 percent by mid-2015.
"The reason for the higher inflation projection is that, in
terms of the short-term unemployment rate, there is currently
little economic slack," wrote Adam Shapiro and Yifan Cao, both
researchers at the San Francisco Fed.
(Reporting by Ann Saphir; Editing by Dan Grebler)