Analyst Hikes CPI Inflation Forecast, Expects Fed To Raise Interest Rates Another 1.75% By February

Zinger Key Points
  • Bank of America increases its CPI inflation forecast.
  • The firm anticipates interest rates will rise by another 1.75% by February 2023.
Analyst Hikes CPI Inflation Forecast, Expects Fed To Raise Interest Rates Another 1.75% By February

The Consumer Price Index (CPI) was up 8.3% in August and remains at multi-decade highs despite the best efforts of the Federal Reserve to get inflation under control.

On Friday, Bank of America economist Michael Gapen raised his near-term outlook for CPI inflation and said it may take a little bit longer before the monetary policy starts making a meaningful impact.

The Numbers: Gapen said the higher-than-expected August CPI reading shot down hopes that goods inflation had peaked in July. As a result, he raised his year-end CPI forecast from 5.3% to 5.9%. In addition, Gapen said the Fed will be forced to continue its aggressive tightening.

Related Link: S&P 500 Snaps 3-Week Losing Streak As Investors Digest Powell's Latest Inflation Comments

The Federal Reserve has already issued two consecutive 0.75% interest rate hikes at its last two meetings. The bond market is pricing in a 100% chance the Fed will raise rates by at least another 0.75% at its September meeting later this month, according to CME Group.

Rising Rates: Gapen said the Fed likely still has work to do even after it raises rates again this month. He projects the Fed will raise rates by a total of 1.75% between now and February 2023, pushing the fed fund target range to a peak of between 4% and 4.25%.

"Beyond this year, we look for restrictive monetary policy to cool off the labor market and for goods prices to experience a period of disinflation," Gapen said.

Related Link: Hot Wage Growth, 'Encouraging' Jobs Data: 5 Experts React With Interest Rates Hanging In The Balance

Fortunately, he still anticipates the Fed will finally get inflation under control in 2023 and 2024. Bank of America is now projecting CPI growth of 3% by year-end 2023 and 2.5% by year-end 2024.

Benzinga's Take: The August CPI reading has really done a number on the stock market. The SPDR S&P 500 ETF Trust SPY is down 5% in just three days since the inflation number was released earlier this week.

Photo: Gerd Altmann from Pixabay 

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