Wall Street analysts quickly adjusted their forecasts after the third straight month of bad inflation news.
The affordability crisis was one of the main issues driving voters in the midterm elections. And those frustrations were echoed in the latest inflation data, showing increases in the prices of food, rent, medical care and electronics.
As Bank of America analysts said Tuesday, “goods prices are becoming a problem (again)” and the recent strength in inflation is spreading to more of the things Americans need and want to buy.
Wall Street has already estimated that rising costs have all but ensured another rate hike in December. But the new inflation figures have been so discouraging that analysts are changing their projections or increasingly considering bigger rate increases.
Learn more: How Employment, Inflation, and the Fed Are All Related
Fed Governor Christopher Waller has already proposed a “giant” 50 basis point hike for December, based on hot October data.
BofA analysts, like JPMorgan, also question the Fed’s decision-making process, describing central bankers as locking themselves into a “coulda, woulda, shoulda” situation.
“We are maintaining our call for a 25 basis point hike for now. But the Fed appears to be falling behind the inflation curve, and holding in October looks like a policy mistake. We see a growing risk that the Fed will have to raise rates again in January (rather than March),” Bank of America analysts wrote.
Other observers predict additional increases next year.
David Mericle of Goldman Sachs predicts the Fed will raise rates for the third time in March. Mericle predicts that inflation will be significantly lower by the end of 2027 as the effects of tariffs, the energy shock and AI pricing pressures ease. But to take this path, central bankers will likely need to adopt a more hawkish stance.
The latest inflation report, he said, includes positive surprises in several categories that cannot be fully explained by the energy shock from the Iran war.
As Federal Reserve economists recently found, the post-pandemic economy appears to be sustaining inflationary pressures for longer. And it has become more sensitive to oil shocks, more easily passing on price increases in the energy sector to the rest of the economy.
That’s another way of saying that it’s harder than ever to be an American central banker or consumer. In particular, as recent Wall Street notes argue, affordability is likely to get worse before it gets better.
Follow Hamza Shaban on @hshaban.
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