After tumbling last fall, inflation has remained stubbornly elevated this year.

The split-screen picture raises a pointed question for the Federal Reserve: Is the recent flare-up a blip or the beginning of a tougher slog in its two-year inflation fight?

Fed officials will likely clarify their view at a two-day meeting that concludes Wednesday. Although the central bank almost certainly won’t reduce its key interest rate, it is set to release new forecasts for the economy, inflation, and rates that themselves could affect growth and move markets.

Several leading economic research firms, including Barclays and JPMorgan Chase, predict Fed policymakers will lower their forecast to two rate cuts this year from three in December while raising their projections for growth and inflation, according to their median estimates.

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With consumer price increases ticking higher in January and February, “It will be hard for them to continue to show three cuts,” says Jonathan Miller, senior U.S. economist at Barclays.

Others, including Goldman Sachs and Morgan Stanley, expect the Fed to stick to its forecast of three rate cuts on the belief that inflation will continue to slow steadily. That approach likely would bolster stocks, business confidence and the economy as consumers and companies look forward to lower borrowing costs.

Gregory Daco, chief economist of EY-Parthenon, thinks the Fed will revise down its estimate to two rate cuts but that would be a mistake.

“I think they’re probably overreacting to very noisy data,” Daco says, meaning the inflation numbers reflect measurement quirks and one-off price gains rather than underlying trends.

Futures markets estimate the Fed will start trimming rates in June and approve three quarter-point cuts this year. Fed officials have penciled in another four rate decreases in 2025.

How much has the Fed raised interest rates?

Since March 2022, the Fed has hiked its benchmark short-term interest rate from near zero to a 23-year high of 5.25% to 5.5% to tame inflation. With its preferred yearly inflation measure – the personal consumption expenditures (PCE) index – falling swiftly from a 40-year high of 7%, the Fed has held off on increases since July.

Economists attribute the progress to the unwinding of pandemic-related product and labor shortages as Americans sidelined by COVID returned to the labor force, joining a surge of immigrants. Also, consumers’ strong demand for furniture, appliances and other goods while they stayed home during lockdowns has shifted to services such as dining out and traveling.

Has inflation gone down recently?

In January, however, consumer prices overall rose 0.3% from the previous month, much faster than the previous trend.

And a core measure that excludes volatile food and energy items and that the Fed watches more closely jumped even more sharply, by 0.4%. The readings still lowered annual inflation to 2.4% and the core measure to 2.8% moderately above the Fed’s 2% goal.

Fed Chair Jerome Powell told Congress recently the agency is “waiting to become more confident that inflation is moving sustainably to 2%.”

Last month, though, a different inflation gauge, the consumer price index, as well as the core CPI, both rose a hefty 0.4%, according to a report last week, intensifying the concerns. The cost of services such as rent, auto insurance, car repairs and airline fares continued to rise briskly. Even more worrisome: Prices for goods that had been falling or rising modestly, such as used cars and clothing, climbed notably higher.

What is the forecast for inflation in 2024?

Millar of Barclays frets that the drop in goods prices has played out. At the same time, military conflict at the Suez Canal and low water levels at the Panama Canal have disrupted global shipping, boosting the risk of still higher goods prices.

Meanwhile, he says, average U.S. wage growth, which feeds into service prices, is slowing now that COVID-related worker shortages have eased but only gradually. And rent increases, especially for single-family homes, aren’t moderating as rapidly as anticipated.

Barclays predicts the February PCE inflation report, which is based partly on CPI and due out next week, will show that prices rose 0.4% in February, nudging annual inflation to 2.5% from 2.4%. It estimates the core measure increased 0.3%, leaving the annual gain unchanged at 2.8%.

On Wednesday, Barclays reckons, the Fed will likely raise its 2024 core inflation forecast to 2.6% from 2.4%, suggesting officials believe it will slow just modestly by the end of the year. The research firm, along with several others, also expects the Fed to lift its estimate of economic growth this year to 1.8% from 1.4% in December.

Is the US economy strong right now?

The economy grew a sizzling 4% in the second half of last year and job growth, while slowing, has been surprisingly robust.

Since the economy and labor market are on solid footing, “You probably want to err on the side of caution” and lower rates just slowly to ensure inflation is subdued, Millar says.

Other forecasters disagree. Retail sales were feeble the first two months of the year, a development that "points to the Fed (lowering rates) sooner rather than later," says Ian Shepherdson, chief economist of Pantheon Macroeconomics.

Bank of America figures the decline in goods prices will resume, easing inflation worries.

And Daco says the inflation spike in January and February can be at least partly traced to the challenges government officials have faced as they seasonally adjusted the raw data early in the year. Airfares have increased recently, he adds, but they’re volatile and economists have blamed a surge in jet fuel prices.

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And while car insurance and repair costs have leaped, Daco points to the rapidly rising costs of new vehicles and parts, not the wage hikes that the Fed is aiming to slow by lifting employers’ borrowing costs. The average annual rise in wages and salaries has fallen steadily to 4.3% at the end of last year from 5.7% in mid-2022, according to the Labor Department’s Employment Cost Index.

Daco expects core PCE inflation to fall to 2.4% by year's end, close to the Fed's goal.

In his testimony, Powell told lawmakers officials are “not far” from gaining the confidence that inflation is on a sustainable path to 2%.

Powell is likely drawing that confidence not just from inflation data but from strong gains in the U.S. labor supply that could continue to temper pay increases, among other factors, Morgan Stanley says.

“We think (Powell) will push to keep (the rate cut forecast) at three,” the research firm wrote in a note to clients.