The head of the San Francisco Federal Reserve has shrugged off concerns over the recent persistent inflation under-shooting, arguing that the “strong” economy meant he felt confident that prices would rise and justify higher interest rates.

Aside from an August uptick primarily caused by Hurricane Harvey’s impact on gasoline prices, the headline US inflation rate has undershot expectations for five months running, and the Fed’s preferred measure of inflation has dipped to just 1.4 per cent – compared to the central bank’s 2 per cent target.

But John Williams, president of the Fed’s San Francisco branch, insisted in a briefing for journalists in Zurich on Friday that there was nothing “baffling” about the subdued inflation readings, attributing them to an array of idiosyncratic issues.

“I push back against this ‘mystery,’ or other arguments,” he said. “What we actually see is that some specific prices have been hit by some downward movements. In certain categories, including healthcare, inflation has been much lower than it had been in the past.”

Mr Williams’ comments highlights how many policymakers are seemingly willing to look past muddled data and continue the Fed’s path towards “normalising” monetary policy. Indeed, earlier this week the central bank’s board indicated that another interest rate increase later this year was likely, in addition to announcing the slow but seismic tapering of the Fed’s balance sheet.

Mr Williams said that prices of goods and services that tend to be more sensitive to the health of the economy were nudging higher, and expects that to continue “because I expect the economy to be very strong”.

The Fed’s semi-official line has been that inflation has been held back by a variety of one-off factors, but the persistence has stirred some concern. New York Federal Reserve head Bill Dudley admitted earlier this month that he was “surprised” by the extent, and raised the possibility that it might be caused by a structural changes to the economy and commerce.

“While some of this year’s shortfall can be explained by one-off factors, such as the sharp fall in prices for cellular phone service, its persistence suggests that more fundamental structural changes may also be playing a role,” Mr Dudley told a conference earlier in September.



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