By Emily Kaiser
WASHINGTON, Oct 11 (Reuters) - Depending on who you ask, U.S. inflation is either looking unusually tame for the foreseeable future, or it is on the verge of exploding.
Or perhaps both.
This debate is growing louder as the global economy pulls out of recession, and it is complicating an already tough task for policymakers who must decide when it is safe to withdraw emergency economic supports.
Surveys of economists show a widening gap between the most optimistic and pessimistic views, both on the U.S. economic growth trajectory and the likely path of inflation.
The latest Blue Chip survey, which polled more than 50 top economists from Wall Street, academia and Corporate America, showed the gap between the 10 highest and lowest forecasts on long-range growth and inflation had roughly doubled since March 2008, which was before the worst of the financial crisis.
"There's been a distinct widening of expectations about growth and inflation going forward, depending upon whether one is optimistic or pessimistic about the government's ability to successfully unwind all the stimulus -- both monetary and fiscal -- that's been applied to the problem," said Randell Moore, executive editor of Blue Chip Economic Indicators.
The next look at inflation comes this week, with readings on Thursday from both the United States and the euro zone. Both are likely to show modest month-over-month increases.
But there is scant agreement on where inflation is headed, even among officials at the U.S. Federal Reserve.
Minutes from their most recent policy-setting meeting are due on Wednesday, and are expected to include the central bank's updated economic forecasts.
The prior set of forecasts, which the Fed publicly released in July, showed a particularly wide range of inflation expectations for 2011. That is significant because monetary policy operates with a lag, so its future expectations weigh heavily on today's thinking about interest rates.
FINDING THE RIGHT WORDS
The Federal Reserve Bank of San Francisco tried to figure out what was behind the widening gap in inflation forecasts, and what it might mean for how the central bank communicates its policy intentions. It released a letter last week that essentially broke the debate down into two time periods. (http://www.frbsf.org/publications/economics/letter/2009/el2009-31.html)
Some economists had lowered their short-term inflation forecasts, arguing that high unemployment and low resource usage has left considerable slack in the economy. That widened the short-run forecast gap.
But longer term, economists were marking up their inflation forecasts, "possibly because the Fed may not be able to appropriately remove its extraordinary monetary stimulus when the economy recovers," the San Francisco Fed wrote.
That puts the Fed in a tricky situation. To assuage short-term concerns that inflation might fall too low, it must be clear that it is committed to forestalling "any alarming trend toward much lower inflation," it said.
But the rise in long-term inflation forecasts suggests economists have some concern the Fed won't be able to resist political pressure to buy U.S. government debt in order to finance a ballooning federal deficit. That means the Fed must show it hasn't wavered in its commitment to keeping prices stable.
Fed Chairman Ben Bernanke tried to walk that tightrope last week when he said that the central bank must continue to prop up the economy for an extended period but can't do so indefinitely. For more, see [ID:nN08537898]
If the gap in inflation forecasts keeps widening, he may be repeating that message frequently. (Editing by Chizu Nomiyama)