Bank of America on Friday raised its forecast for inflation and moved up the date it expects the Federal Reserve will hike interest rates.
In their weekly update on the U.S. economy, the bank’s economists found wrote that “supply-side challenges in the US are likely to continue through 2022 and sticky inflation is also strengthening.”
The bank is now forecasting the core Consumer Price Index to be at 3.2 percent next year, up from the earlier forecast of 2.5 percent. Core CPI excludes food and energy prices. The bank moved its estimate for the core Personal Consumption Expenditure price index, an inflation gauge compiled by the Department of Commerce and closely watched by the Federal Reserve, from 2.1 percent to 2.4 percent.
The median projection of Federal Reserve officials is for PCE prices to rise 2.3 percent next year.
The bank thinks inflation will remain high the following year as well, forecasting 2.4 percent PCE inflation and 2.8 percent CPI inflation. This is a stark contrast with Fed officials, whose median forecast calls for inflation to fall to 2.2 percent in 2023.
“Higher and stickier inflation with a fast recovery to maximum employment likely will pull forward the timing of Fed hikes,” the bank said.
It now forecasts the Fed to raise rates in the fourth quarter of 2022 and to hike rates by one-quarter of a percentage point every three-months. That’s considerably later than the June rate hike now implied by Fed Funds futures.
The bank said that the core of the Federal Open Market Committee, which is the Fed’s monetary policy panel, remains committed to its flexible average inflation targeting strategy and will push for a later start than the market currently expects.
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