WASHINGTON — America’s job market is booming and the economy is strong, but that combination is not raising prices the way it used to.
Biscuit Head, a North Carolina restaurant chain serving up gravy flights and homemade jam, would be charging more if the previous economic relationships held up. At 3.3 percent, unemployment in Asheville, N.C., home to three of Biscuit Head’s four locations, clocks in below the national average, and business is brisk. The owners, Carolyn and Jason Roy, have been lifting wages and offering new benefits as they seek to attract and retain staff.
Yet they haven’t raised prices on their giant buttermilk biscuits all that much. The stable pricing is sustainable partly because the Roys have gotten less picky about whom they hire. By looking at applicants with limited experience and even criminal records, they can find workers at wages that shrink — but don’t kill — their profit margins.
“It used to be that you’d look at résumés, and some things were an automatic disqualifier,” Ms. Roy said. “Now there’s really no disqualifier. Anyone who comes in, we’ll interview them.”
Across the United States, a similar cocktail seems to be keeping inflation at bay: Employers are reluctant to charge more, unsure how consumers will react, and they’ve found an untapped supply of workers. It’s partly great news. More Americans are getting jobs than policymakers once thought possible, and wages and prices aren’t spinning out of control the way history would predict.
But it is posing a big challenge for the Federal Reserve. Stubbornly low inflation is raising questions about whether the central bank can achieve one of its primary goals — to keep prices growing slowly and steadily. By keeping interest rates low, it could also hinder the central bank’s ability to steer the economy should another downturn occur.
Inflation rose a scant 1.6 percent in the year ending in March, well short of the central bank’s 2 percent target. The Fed’s policymakers are worried about the continuing sluggishness, and President Trump has repeatedly cited low inflation as a reason for the central bank to start cutting interest rates.
“We are doing very well at 3.2% GDP, but with our wonderfully low inflation, we could be setting major records &, at the same time, make our National Debt start to look small!” Mr. Trump said in a recent tweet.
The Fed, for its part, is wrestling with how to respond to persistently low inflation amid what appears to be the weakening of a foundational economic relationship. Unemployment is at its lowest level since 1969, which should spur higher wages as companies compete for workers. Climbing labor costs should eventually get passed along to customers, driving inflation up. Instead, it is moderating.
While low inflation might sound great, a never-ending shortfall might hurt the economy. Modest price increases can brighten the economic picture by allowing wages to rise without crushing profits. Janet L. Yellen, the Fed’s former chairwoman, often describes inflation as a lubricant on the wheels of the labor market: It keeps wages chugging along.
“I am concerned that inflation is running lower than I would expect, especially considering that now we’ve had sub-4 percent unemployment for a long time, we’ve had growth that’s surprised to the upside,” James Bullard, the president of the Federal Reserve Bank of St. Louis, said in an interview. “We’re on the wrong side, and it’s kind of going in the wrong direction.”
The breakdown leaves the Fed staring down an uncomfortable question. If officials can’t get that old chain reaction to work 10 years into an economic expansion, against a backdrop of tax cuts and high government spending, and with exceptionally low joblessness, will they ever?
The Fed’s chairman, Jerome H. Powell, has called weak inflation “one of the major challenges of our time.” In part to address it, he has led the Fed to embark on a yearlong review of its communications, tools and strategy. A major goal is determining what is reining in price gains and what can drive inflation back to the Fed’s target in a sustainable way.
Extra labor supply is one obvious culprit. Since 2016 at least some Fed officials have declared the labor market “at or near full employment.” But the job market keeps surprising them. Prime-age workers are hanging on to their positions for longer.
That has provided an unexpected source of new employees, enabling brisk hiring to persist without a run-up in wages and prices. Average hourly earnings have shown progress without rocketing up.
Officials have repeatedly lowered their estimates of sustainable unemployment as a result, and Richard Clarida, the Fed’s vice chairman, has suggested that the jobless rate is “not far below many estimates” at that revised level.
Neel Kashkari, the president of the Federal Reserve Bank of Minneapolis, goes a step further. He thinks that the Fed, which has raised interest rates nine times since 2015, began doing so too early and that the economy remains below full employment. Premature tightening has convinced the public that inflation won’t rise to 2 percent this business cycle, he thinks, and now consumers and businesses are acting accordingly.
Beyond slack in the labor force and expectations, forces like technology and globalization may be restraining pricing power. Consumers with Amazon and Yelp in their pockets can easily avoid overpaying.
“To the extent that businesses have price increases, they may very well be unable to pass them on,” Robert S. Kaplan, the president of the Federal Reserve Bank of Dallas, said in an interview. “I don’t think that’s changing. If anything, it may be intensifying.”
Regardless of its cause, the dilemma has a global flavor. Low inflation plagues central banks from Japan and New Zealand to the eurozone, threatening serious fallout.
Falling inflation raises the risk that economies will slip into outright deflation if growth weakens, making downturns worse as consumers hoard their cash, knowing that prices will be lower tomorrow. It also means policymakers will have less room to ease policy come next recession, because interest rates count in price gains.
John Williams, the president of the Federal Reserve Bank of New York, has warned that could unleash a dangerous feedback loop. During a recession, central banks won’t be able to cut rates by enough to ever coax inflation back up to target, and expectations will fall further with each passing business cycle.
“The facts have changed,” Mr. Williams said in a recent speech urging a global rethink of economic policy.
As part of the Fed’s strategy review this year, top officials will meet in Chicago next month to discuss how monetary policy works — and how it should. Mr. Powell has described the goal as an evolution, rather than a revolution.
Whatever approach they take to lifting inflation, officials will have to convince the public that they mean it. Inflation expectations are slipping among both economic forecasters and consumers, based on two recent Fed surveys. Just 56 percent of Fed watchers thought policymakers had the tools to achieve their target, down from 60 percent a year earlier, according to a survey run by the research firm MacroPolicy Perspectives.
If price increases get stuck in low gear permanently, consequences could reverberate from the Fed’s Marriner S. Eccles Building in Washington to the dining scene in Asheville.
In inflation’s absence, Ms. Roy from Biscuit Head is seeing her fellow restaurateurs make tough choices. They can’t charge enough to cover higher wages, because their competitors are holding prices fairly steady. That leads to understaffing, and has caused some owners to give up the game altogether.
“If you’re perceived as being too expensive, people aren’t going to want to come,” Ms. Roy said. “It really is a balancing act.”