THE chance of U.S. inflation falling below 1 percent in 2015 is at a five-year high, and the risk of deflation is growing more likely, an analysis of market data released by the Minneapolis Federal Reserve Bank showed.

    Federal Reserve policymakers should take such changing market expectations into account when they make policy decisions, Minneapolis Fed President Narayana Kocherlakota and several of the bank’s top economists said in a paper published Tuesday.

    “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,” the authors said. “Both of these changes should matter for a policymaker.”

    The Fed earlier last month effectively took the opposite view, downplaying falling market-based measures of future inflation and laying the groundwork for raising interest rates in 2015.

    Kocherlakota dissented, arguing that the Fed should respond more forcefully to a weakening inflation outlook. The paper published Tuesday provides some of the theoretical backdrop for that view. Inflation has averaged 1.5 percent for the past several years.(SD-Agencies)