Fed economist: Inflation to remain 'sticky' in 2026

Economic growth in Texas and in the greater Houston region will likely be tepid while inflation will continue to be "sticky" in 2026, an economist told a Fort Bend County audience last week.

Jesse Thompson, a senior business economist with the Federal Reserve Bank of Dallas's Houston branch, spoke at the Ford Bend County Chamber of Commerce in Sugar Land on Dec. 18.

"The forecast is for trend or near-trend GDP growth through 2026, 1.8 to 2 percent," Thompson told an audience of business leaders and elected officials. "We're a little bit below that."

"Somewhere around trend is where we are, and it looks like we're going to stay (in 2026)," he said.

Thompson said that inflation in 2026, which the Fed had earlier projected would ease to its target goal of 2 percent in 2025, is projected to remain elevated in 2026.

"It's a little bit stickier than we projected earlier, for a variety of reasons," he said, with the inflation rate projected to remain in the 2.5 to 3% range.

Among the reasons for the expected continued inflation are policies instituted by the Trump Administration, particularly its tariff policy.

"Federal policy is mixed, for a variety of reasons, and uncertain," he said.

Thompson said that is reflected when the Fed polls business leaders across the country, including in Texas.

"We have many businesses that say I would really like some more clarity, some certainty, and stability of policy. It's hard for many businesses to find that happy medium where they're splitting the upside/downside risk between policy choices," he said.

The employment and wage growth projections for Texas are decidedly mixed, but Thompson cautioned that the data from recent months has been murky due largely to the recent government shutdown.

"Texas job growth is approaching 0.9 percent growth in 2025, based on data through September. We have potentially very significant revisions to jobs data in Texas across all sectors.

"Houston is coming in at about 0.5 percent jobs growth in 2026. That is very, very low. But it is still growth," he said. The underlying trends call for about 1.7 percent job growth, he said.

One bright spot for the Houston region is that oil prices are rising after a long period of decline, which should end layoff in the oil and gas production sector, Thompson said.

"The good thing for Houston is that the worst has likely passed," he said. "That doesn't mean there's a recovery in 2026. But it does mean that it isn't a drag on the region."

The construction and real estate sectors are likely to be "soft" in 2026, he said.

One thing buttressing the overall economy is that consumer expenditures remain strong, Thompson said. But, he added, most of that consumption is by higher-earning people, while lower-earning people aren't buying as much since inflation hits their pocketbooks harder.

The Federal Reserve prefers measures of what is called "core inflation," which strip out highly volatile items like food and energy, Thompson said.

"Core inflation is still pretty sticky. Some of it is affecting the lowest-wage earners the most," he said, adding that the current data is still "choppy."

The Administration's immigration policies are also having an impact on the employment outlook, Thompson said.

"The immigration shock is doing two things simultaneously. It's pulling labor supply out of the market, and also pulling demand out of the market. That dual effect is making predictions about the labor market really cloudy," he said.

"Texas manufacturing is seeing an uptick in production, driven by certain niche sectors, LNG pipelines, data centers, and semiconductors. I don't know how sustainable it is," he said.

Thompson said that the services sector is seeing a slight decline.

"This doesn't mean that we're in (an overall) decline but it does mean that services numbers aren't as positive as they were," he said.

"Service sector leaders are saying they are less optimistic about the next six months because of a fear of business slowdown. They've stopped telling us that they are understaffed and they are more or less balanced. There's definitely some softness there," he said.