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Use your common sense. Say a family member wanted to make a life altering decision, but needed certain requisites that it arbitrarily made up and those conditions were conflicting, what would you advise? To wit: The Federal Reserve is likely to stand pat on policy when it concludes a two-day meeting next week, but it faces a debate about the future path of interest-rate increases because of a deepening puzzle over inflation.

Officials will likely leave short-term rates unchanged and wait until September before announcing plans to slowly shrink their $4.5 trillion portfolio of bonds and other assets.

They face a dilemma, however, because the two sets of economic indicators they most closely monitor are sending conflicting signals about the urgency of additional rate increases.

The unemployment rate, which hit a 16-year low in May, shows labor markets are tightening. That argues for the Fed to keep lifting interest rates to prevent the economy from overheating. But inflation is drifting away from the central bank’s 2% target, suggesting borrowing costs should stay low to strengthen price pressures.

Slowing Down

Service-sector inflation has softened in recent months. Wireless services posted a drop, while housing and medical services have also seen restrained price pressures.

Percentage-point contributions to annual core inflation (excluding food and energy), based on the personal-consumption-expenditures price index

Moreover, the recent inflation weakness appears more broadly based than it did when officials met last month and Fed Chairwoman Janet Yellen dismissed it as largely due to one-off price declines for a handful of items. She cited, for example, price discounts for wireless-phone plans in March and a drop in drug prices in April.

Data since then show housing costs rose 3.4% over the year ended May, but have increased at a 2.7% annualized rate over the past three months, a sign rising inventories of newly built apartments have weakened landlords’ pricing power. While consumers would welcome a respite from rising rents and home prices, those costs have been a key reason inflation hasn’t been even weaker in recent years.

Likewise, growing inventories of used cars have weighed on their sales prices.

“Many of these things—airfares, apparel, autos—you expect to pick up as the business cycle lengthens, and they’re going in the wrong direction,” said Omair Sharif, senior U.S. economist at Société Générale.

Moreover, structural changes at retailers, which face growing competition from online sellers, “mean you’re getting a lot of cut-rate pricing by traditional retailers to maintain market share,” said Michael Gapen, chief U.S. economist at Barclays.

Economists at Goldman Sachs have cited quality adjustments for health-care services as another potential cause of future one-off price declines.

After touching the Fed’s 2% annual target earlier this year, inflation has been weak for three consecutive months, according to the Fed’s preferred gauge, the Commerce Department’s personal-consumption-expenditures price index. Inflation has been soft for four months by a separate Labor Department measure.

Top Fed officials have recently questioned, but not scrapped, their expectation that the inflation weakness will prove transitory. Ms. Yellen last week told lawmakers “there may be more going on” than a series of idiosyncratic price declines, but she also said it was “premature” to conclude underlying inflation was falling well short of 2%. “We have quite a tight labor market, and it continues to strengthen,” she said. baby blue colored items to wear of the prom

Fed officials, relying on traditional forecasting models, expect tight labor markets to eventually drive faster wage growth, which should push up service-sector prices. Goods prices are expected to firm, because the impact of a stronger dollar has faded, curbing declines in import prices.

Projections released last month by the Fed forecast that inflation will return to the 2% target by the end of 2018. But some officials are doubtful.

“My inflation outlook is not quite as sanguine as this projection,” Chicago Fed President Charles Evans said in a speech released last week.

The Fed has raised its benchmark short-term interest rate three times in as many quarters, to a range between 1% and 1.25%, and Ms. Yellen appears to have had little trouble forging a consensus for the Fed’s policy path to this point. At their last meeting, officials penciled in one more quarter-point increase this year.

The inflation weakness hasn’t moved the Fed off this course yet, but it could be harder for Ms. Yellen to maintain agreement now that the unemployment and price data are pointing interest-rate policy in different directions.

Meantime, most officials have indicated they’re ready to start shrinking the Fed’s bondholdings in coming months—though not as soon as next week.

They finalized their plans for the process last month, and appear likely to launch it at their September meeting, which is also the next meeting at which Ms. Yellen is set to hold a news conference. They would then wait until December to consider the next interest-rate increase, after parsing several more months of inflation data.

“Let’s start the process” of reducing the bond portfolio, said Philadelphia Fed President Patrick Harker in an interview last week. “Let’s see how the market reacts to that, and then consider the third rate increase this year—whether that occurs or not.”

Recent inflation softness has given more ammunition to the Fed’s so-called doves who want to see more proof of price pressures before raising rates. Fed governor Lael Brainard said last week she wanted to be “very cautious about making sure” that the Fed is “very firmly…defending the credibility of our symmetrical 2% target.”

Inflation has remained below that target almost continuously for more than eight years, including virtually the entire 5½-year period since the Fed formally adopted the target. “This is a serious policy-outcome miss,” Mr. Evans said last week

Fed Faces Inflation Conundrum The Fed is likely to stand pat on policy when it concludes a policy meeting next week, but it faces a debate about the future path of interest-rate increases because of a deepening puzzle over inflation.wsj.com