Bumps along the road to disinflation are likely raising concern inside the Federal Reserve that the swift return to price stability which looked all but assured a few months ago is now drifting from view, former Fed officials and staffers told MNI.

The Fed is expected to issue fresh projections at this week's meeting showing inflation numbers revised higher and a shallower path of interest rate reductions in 2025 – even without incorporating potential tariffs of 25% on Canadian and Mexican imports, 10% on Chinese goods or restrictions on immigration promised by President-elect Donald Trump. 

Core PCE inflation is tracking at 2.9% in November, three-tenths hotter than projected by the FOMC in September, according to UBS economist Alan Detmeister, who previously headed the wages and prices section at the Fed Board of Governors. Core CPI inflation has flatlined at around 3.3% since early summer.   

"There's a little bit more of a feeling that inflation may be stubborn to get down the last bit of the way towards 2%," Jonathan Wright, a former member of the Fed Board's division of monetary affairs, told MNI. 

"I don't think they're going to want to get too close to where they think neutral is while inflation is still drifting around 2.7. The disinflation has been more painless than most people expected. But that idea that the last bit will be the hardest is still there and I think that will be a theme of some of [Chair Jerome Powell’s] comments in [this week’s] press conference." (See MNI INTERVIEW: Ex-Fed's Blinder Sees Stagflation Shock Ahead)

SERVICES PRICES

Former Atlanta Fed President Dennis Lockhart estimates trend inflation to be in a 2.5% to 2.8% range and reckoned a significant minority of the FOMC is likely to argue this week that the committee needs to address immediately the lack of satisfactory progress on inflation. They aren't likely to prevail, he added, but upside risks are rising.

Services are still running hot in response to robust demand. The largest component, housing, has been stubbornly high for months, though Fed officials are likely cheering an unexpected moderation in rents last month and hoping it will continue. They have also expressed less concern about sturdy non-housing services prices, saying the labor market isn't a source of inflationary pressures as productivity remains elevated. 

"With a December cut, they'll have finished a significant recalibration of rates, recognizing the substantial reduction in inflation so far. A skip in January is rather likely and March could be contentious," Lockhart said. "The inflation data have been presenting questions about the outlook, and by then some actions will be made by the administration." 

William English, a former director of the division of monetary affairs at the Fed’s board of governors, agreed a skip in January appears likely. "Having seen inflation kind of hanging up more than they expected, they'll want to move pretty slowly in providing more accommodation," he said. 

GOODS PRICES

Core goods prices saw a notable pickup last month, perhaps in anticipation of potential tariffs. Additionally, a record number of consumers surveyed by the University of Michigan in December said purchasing durable goods now would enable them to avoid future price increases. 

"There is a material risk – which might be underweighted by the committee – that inflation levels out before getting to 2%, and we find ourselves a year from now with inflation not that different from what it is now," former Richmond Fed research director John Weinberg said. 

"As far as I can tell, possible actions by the new administration, if anything, mainly point in an unfavorable direction for inflation."