John,

As a general rule, it's disrespectful, but perhaps there is context we're missing. 

Some people have unique friendly relationships with their priests. I have many friends that are priests. In private, I talk to them on a first name basis. In public or in front of people, I'll call them Father.

Your mother-in-law could be joking with him. Have you asked her about it.

I would not make a major issue of this. It's not really a battle worth engaging in. We can't be responsible for correcting every minor infraction another person makes.  Her actions don't violate any particular canon law that I'm aware of.  If it bothers him, It's really up to the priest to address. 

You can and should pray for her. Let the Holy Spirit work on her. It's His Job.

Under His Mercy,

John,

Yes, it’s disrespectful, unless he is her actual son. Even then most moms of priests call their sons “father".  She clearly doesn't understand that men who become priests share a spiritual fatherhood, rooted in Christ, the image of the Father.  St. Paul called himself Timothy’s spiritual father (1 Timothy 1:2), and the tradition has stuck with good reason.

Perhaps she heard some misguided Protestant raise the objection that we should call no man “father,” based on Jesus’ teaching (Matthew 23:9).  If that is the case, some correction may be needed to clear up that particular interpretive error.  

Jesus was objecting to:

• those who put men in God’s place or claim to have their own way to God, (literal idols and idolaters),
• whereas priests serve God in Christ and do not compete with Him, but act as his agents; Paul would be violating the Protestant interpretation in the most egregious way were they correct.

I would find out where she is coming from and try to clear things up with the relevant points.

Peace,

Bob