The stubbornness of US inflation has once again been confirmed by data. After September inflation data came in above expectations, Bank of America Securities raised its forecast for the Fed's favorite inflation gauge, core PCE, and reiterated its call for an October rate hike, with analysts warning that signs of broadening inflation make the Fed's earlier dovish stance look premature.
The earlier September CPI report showed broader upward price pressures in core inflation. Meanwhile, the September PPI data released on Thursday significantly exceeded market expectations — PPI rose to 6.3% year-on-year, a four-year high, while core PPI widened to 5.0% year-on-year — further reinforcing the judgment that inflation will be difficult to cool in the short term. Combined, the two reports have caused market expectations for the Fed's rate hike path to converge.
Bank of America economists Aditya Bhave and Stephen Juneau noted in an October 15 report that the deepening breadth of inflation means progress toward a sustainable decline in core inflation remains limited. Within the core CPI consumption basket, the share of items with a three-month annualized gain exceeding 2.5% has rebounded to 55%, a recent high.
The two economists argued that the dovish signals recently released by the Fed, especially by New York Fed President Williams and Vice Chair Jefferson, are "puzzling," stressing that waiting for all data to land before each meeting is the more prudent approach.
Broadening Inflation Is the Core Concern
Bank of America's focus is not only on inflation data beating expectations, but also on the extent to which price pressures have spread. The key indicator the bank uses — the share of the core CPI basket with a three-month annualized gain exceeding 2.5% — has rebounded from a prior low to 55%, indicating that the disinflation trend of recent months has clearly reversed.
Bank of America believes the significance of this signal lies in the fact that cooling inflation is not merely a localized pullback in certain components, but requires price pressures to slow simultaneously across a broader basket. The current rebound in the breadth indicator means the foundation for inflation's return to a sustainable low level is not yet solid.
Looking at the PPI data, energy prices surged more than 10% in a single month, while transportation and warehousing prices rose 3.4% month-on-month, with multiple components showing strong price pressures, indicating that the risk of producer-side costs feeding through to downstream consumer prices continues to build.
Core PCE Forecast Raised, Rate Hike Case Strengthened
After the CPI data was released, Bank of America raised its month-on-month forecast for September core PCE by 10 basis points to 0.32% from about 0.22% previously. Core PCE is the Fed's preferred inflation reference for setting monetary policy, and the upward revision directly supports Bank of America's call for an October rate hike.
Bank of America maintained its previous stance — the Fed should raise rates again at its October meeting. The report's wording suggests the bank believes the current data picture is clear enough, and continuing to wait would instead risk sending the wrong signal.
In the upcoming economic data calendar, the market will also focus on September retail sales and remarks from several Fed officials, including Fed's Goolsbee, Hammack, and a conversation between Warsh and IMF Managing Director Georgieva, which may further influence market pricing of the rate hike path.
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