The drop in U.S. inflation since mid-2008 is not just a narrow reflection of housing market weakness but is rather a sign of broad economic slack, economists at the Federal Reserve Bank of San Francisco said Monday.

The finding, published in the latest Economic Letter from the regional bank, comes as Fed policy-makers weigh how much longer to keep short-term interest rates near zero, where they've been since December 2008.

Subdued inflation, along with other factors including high unemployment, warrant keeping rates exceptionally low for an extended period, the monetary policy-setting Federal Open Market Committee said after its most recent meeting in March.

However, recently some top Fed officials have begun to question whether the extended period language continues to be warranted in light of signs that the economy is regaining its footing. The government's closely watched employment report released Friday showed U.S. employers created jobs in March at the fastest rate in three years.

As the debate over the Fed's accommodative policy gathers pace, the San Francisco Fed researchers' findings could help blunt concern the steep drop in housing prices may be masking inflationary trends that might otherwise trigger a change in monetary policy.

Some analysts have raised the question of whether the unprecedented declines in house values, which have been the hallmark of the recent recession, might be artificially dampening core inflation readings, economists Bart Hobijn, Stefano Eusepi, and Andrea Tambalotti wrote in the Letter.

However, a close examination of recent inflation data shows that the weakness in housing costs is representative of a broad pattern of subdued price increases across most consumption goods and services and is not distorting the broad downward trend in core inflation measures.

The economists calculated the personal consumption expenditures core price index -- one of the main measures the Fed uses to track inflation -- excluding the housing component, and compared it to the index with the housing component intact.

They found that while housing prices did drag on inflation, the effect was small, and overall they were just one component of a broad-based decrease in inflationary pressures since the peak of the financial crisis.

The same was true when the economists made a similar calculation for the better-known consumer price index, or CPI.

No matter whether housing is included or not, core inflation exhibits a noticeable disinflationary tendency since August 2008, they wrote in the letter. Such pressures are likely due to a large amount of slack in the economy, they said.

The findings bolster the case for continuing to use current measures of inflation, they wrote.

The FOMC next meets April 27 and 28.

San Francisco Fed President Janet Yellen, the leading candidate to replace soon-to-retire Fed vice chairman Donald Kohn, is typically seen as belonging to the Fed's more dovish wing -- that is, less likely to be the first to push for a rate hike.

(Editing by Chizu Nomiyama)

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