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It’s one of the big questions hanging over the U.S. economy: Why is inflation so subdued?

Prices and wages been have sluggish since the 2007-2009 recession, and especially so in the past couple of years. There are signs inflation could tick up soon, but it remains low. It undershot the Federal Reserve’s 2% target for the 23rd consecutive month in March according to the central bank’s preferred measure, the personal consumption expenditures price index.

Economists at the Cleveland Fed have a theory. The current bout of low inflation is the product of multiple factors including slow economic growth, slack in the labor market and “unexpected, temporary events that are specific to inflation,” wrote Edward S. Knotek II and Todd E. Clark in an essay accompanying the regional bank’s annual report.

They estimate about half the slowdown in inflation during 2012 and 2013 can be explained by slower-than-expected growth and stubbornly elevated unemployment that “put downward pressure on inflation.” A quarter of the fall can be pegged to “labor costs, import prices and energy prices.” The remaining 25% or so is due to temporary factors such as a sharp slowdown in health-care inflation.

Inflation is likely to move up in the coming months and years, buoyed by stable expectations and an improving economy, according to Mr. Knotek and Mr. Clark. “The most likely outcome for inflation is not further disinflation or outright deflation, but rather a gradual increase in the rate of inflation,” they wrote.

They said they are “reasonably confident” inflation will rise gradually over the next few years toward the Fed’s 2% target. “However, though the U.S. economy has begun to regain its footing, the inflation forecast could change if unexpected events occur. Our recent experience with very low inflation has highlighted the need to guard against inflation rates that are too low as vigilantly as we guard against inflation rates that are too high.”

Understanding why inflation has been so low, and where it’s headed, would help the Fed plot the future course of monetary policy. Chicago Fed President Charles Evans, for example, has said the central bank may want to keep short-term interest rates pinned near zero for longer if inflation is stuck around 1%.

Fed Chairwoman Janet Yellen, for her part, has emphasized temporary factors in explaining low inflation. “Some of the factors contributing to the softness in inflation over the past year, such as the declines seen in non-oil import prices, will probably be transitory. Importantly, measures of longer-run inflation expectations have remained stable,” Ms. Yellen told Congress last week.



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