By Jason Lange
WASHINGTON (Reuters) - Low U.S. inflation is slowly advancing and will reach 2 percent by late this year, according to a Reuters poll of economists that underscores how the Federal Reserve may soon come under increasing pressure to raise interest rates.
Despite widespread expectations the economy contracted mildly in the first quarter of this year, the survey of 84 economists showed them lifting their forecasts for both job creation and inflation from a month ago.
Conviction is growing that the U.S. economy is back on a stronger growth path that eventually will fuel stronger gains in wages and prices, and with them, higher rates. Strong hiring and inflation data for April appear to have hardened that view.
"The economy is shifting gears, and the biggest risk to business profits is the failure to recognize that labor turnover rates and compensation could soar in the latter part of this year and especially in the first part of 2015," said Joel Naroff of Naroff Economic Advisors.
Well over half of the contributors who responded to both Wednesday's and last month's polls raised their inflation forecasts for all the remaining quarters of this year.
Economists now expect inflation to pick up to 2 percent in the fourth quarter of this year, six months earlier than they predicted in the April poll.
Inflation as measured by the Consumer Price Index is expected to average 1.8 percent this year, a tenth of a point higher than previously forecast, and closer to the Fed's 2 percent target, although the central bank follows a different price gauge that tends to run slightly cooler.
But not every economist is convinced inflation is set to pick up in the coming months - at least not based on wages.
"Wage growth is probably not going to have much impact over the next year or so because wage behaviour at the moment is benign and there is very little tendency for wages to rise except in certain sectors where there are skill shortages," said Stephen Lewis, chief economist at Monument Securities.
To be sure, some of the recent signs of inflationary pressure draw from what may turn out to be temporary factors, like droughts in California and Texas that have pushed up some food costs.
But economists also forecast core inflation, which strips out volatile food and energy prices, rising to 2 percent in the first quarter of 2015, from 1.8 percent at latest measure.
Job growth is a major driver in experts' expectations for inflation. More paychecks in the economy will give businesses and landlords more leverage to raise prices.
Monthly growth in hiring is now expected to hit 221,000 on average in the current quarter, up sharply from 200,000 in the previous poll.
While that is expected to cool down a bit for the remainder of the year, the average forecasts are still slightly stronger than in last month's poll.
Quarterly growth rates for gross domestic product are expected to be at or above a 3 percent annual pace starting in the second quarter of this year.
Still, the Fed will probably wait until the third quarter of 2015 before they raise interest rates.
"With slightly higher inflation and slightly better growth, we have brought forward our forecast of Fed tightening slightly to the second half of 2015 from 2016," wrote Yelena Shulyatyeva U.S. economist at BNP Paribas.
Housing, which was the trigger for the worst financial crisis in more than 80 years and the Great Recession, was always expected to be a requirement for a vigorous recovery. That still remains the main risk, according to the poll.
Fed Chair Janet Yellen earlier this month cautioned that renewed weakness in the U.S. housing market could be lengthy.
(Reporting by Jason Lange and Deepti Govind; Polling and data analysis by Swati Chaturvedi, Anu Bararia and Diptarka Roy; Editing by Ross Finley and Chizu Nomiyama)