Bank of America: Still Expecting Rate Hike in October, Raises Forecast for Fed's Favorite Inflation Indicator

Bank of America warns that the deepening spread of inflation means that progress in sustainably lowering core inflation remains limited. The proportion of the core CPI basket with an annualized increase of over 2.5% in the past three months has rebounded to 55%, a recent high. The dovish signals recently released by the Federal Reserve are "puzzling," and waiting for all data to come in before each meeting is a more prudent approach.

Written by: Xu Chao

The stubbornness of U.S. inflation has once again been confirmed by data. Following the September inflation data exceeding expectations, Bank of America Securities raised its forecast for the Fed's "favorite" inflation indicator—core PCE—and reiterated its judgment on a rate hike in October, with analysts warning that signs of inflation spreading make the Fed's previous dovish statements seem hasty.

The previous September CPI report showed a broader rise in core inflationary pressures. Meanwhile, the PPI data released on Thursday significantly exceeded market expectations—PPI year-on-year rose to a four-year high of 6.3%, and core PPI expanded year-on-year to 5.0%—further reinforcing the judgment that inflation is unlikely to cool in the short term. The combination of the two reports has led to a convergence of market expectations regarding the Fed's rate hike path.

Bank of America economists Aditya Bhave and Stephen Juneau pointed out in their report on October 15 that the deepening spread of inflation means that progress in sustainably lowering core inflation remains limited. The proportion of the core CPI basket with an annualized increase of over 2.5% in the past three months has rebounded to 55%, a recent high.

The two economists believe that the dovish signals recently released by the Fed, especially by New York Fed President Williams and Vice President Jefferson, are "puzzling," emphasizing that waiting for all data to come in before each meeting is a more prudent approach.

Inflation Spread is a Core Concern

Bank of America's focus is not only on the inflation data itself exceeding expectations but also on the degree of price pressure spread. The key indicator used by the bank—the proportion of the core CPI basket with an annualized increase of over 2.5%—has rebounded from previous lows to 55%, indicating a clear reversal of the cooling trend in inflation observed in recent months.

Bank of America believes that the significance of this signal is that the cooling of inflation is not merely a return of prices in specific items but requires price pressures to simultaneously ease across a broader basket. The current rebound in the spread indicator implies that the foundation for inflation to return to sustainable low levels is not solid.

From the PPI data, energy prices surged over 10% in a single month, and transportation and warehousing prices rose by 3.4% month-on-month, with several components showing strong price pressures, indicating that the risk of production costs being passed on to downstream consumers continues to accumulate.

Upgrading Core PCE Forecast, Strengthening Rate Hike Logic

After the CPI data was released, Bank of America raised its September core PCE month-on-month forecast from approximately 0.22% to 0.32%, an increase of 10 basis points. Core PCE is the Fed's preferred inflation reference indicator for formulating monetary policy, and this upgrade directly supports Bank of America's judgment on a rate hike in October.

Bank of America maintains its previous stance—that the Fed should raise rates again at the October meeting. The report's wording indicates that the bank believes the current data pattern is clear enough, and continuing to wait would instead pose the risk of sending incorrect signals.

In the upcoming economic data schedule, the market will also focus on September retail sales and statements from several Fed officials, including Fed's Goolsbee, Hammack, and Warsh, as well as a dialogue with IMF President Georgieva, which may further influence market expectations regarding the rate hike path.

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