MINNEAPOLIS (1/2/15)--The prospect of U.S. inflation tumbling below 1% in 2015 has risen to a five-year high, according to data released by the Minneapolis Federal Reserve this week. Further, the risk of deflation continues to mount.
Analysts found that the probability of inflation falling below 1% has climbed to 72%, and that the possibility of deflation has risen to a "meaningful" 29% (Reuters Dec. 30).
Given those stark odds, Minneapolis Fed President Narayana Kocherlakota and a number of top economists say that when the Federal Reserve makes policy decisions going forward, it's paramount it keeps these changes in market expectations in mind.
"An increase in the market-based probability of an outcome such as deflation could indicate that households consider it as more likely, or it could indicate that the costs associated with deflation have risen," Kocherlakota wrote in a paper published Tuesday (Reuters). "Both of these changes should matter for a policymaker."
Kocherlakota was one of the sole dissenters on a vote by the Fed earlier this month on an opinion that these foreboding market trends don't yet warrant a pause on its plan to raise interest rates later this year.
Instead, Kocherlakota argued that the central bank should take more seriously the hobbled outlook on inflation, which has averaged 1.5% over the past few years.
The U.S. economy has not reached the Federal Reserve's goal of 2% inflation in a number of years, and officials believe that if oil prices continue to bottom out, it will only hamper inflation further throughout 2015.