Bank of America: Still expects a rate hike in October, raises forecast for the Fed's "favorite" inflation indicator

The stubbornness of U.S. inflation has once again been confirmed by data. After September's inflation data exceeded expectations, BofA Securities raised its forecast for the Fed’s "favorite" inflation measure—the core PCE—and reiterated its view for a rate hike in October. Analysts warned that signs of inflation broadening make the previous dovish statements from the Fed seem premature.

Previously, the September CPI report showed that core inflation saw broader upward price pressures. At the same time, the September PPI data released on Thursday far exceeded market expectations—PPI rose year-on-year to 6.3%, the highest in four years, while core PPI expanded year-on-year to 5.0%—further strengthening 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.

BofA economists Aditya Bhave and Stephen Juneau pointed out in an October 15 report that the increased extent of inflation broadening means that progress toward a persistent decline in core inflation remains limited. In the core CPI consumption basket, the proportion of items with an annualized three-month growth rate above 2.5% has rebounded to 55%, a recent high.

The two economists believe that the recent dovish signals from the Fed, especially from New York Fed President Williams and Vice Chair Jefferson, are "puzzling," emphasizing that the more prudent approach is to wait for all data to be released before each meeting.

BofA’s focus is not only on the fact that inflation data exceeded expectations, but more importantly on how broadly price pressures have spread. The key metric used by the bank—the proportion of items in the core CPI basket with an annualized three-month growth rate above 2.5%—has rebounded from its previous low to 55%, indicating a clear reversal in the disinflation trend observed in recent months.

BofA believes the significance of this signal is that: the cooling of inflation is not just about a retreat in certain subcategories but requires a simultaneous slowdown in price pressures across a broader basket. The rebound in the diffusion measure indicates that the foundation for inflation to sustainably return to low levels is not yet solid.

Looking at the PPI data, energy prices surged over 10% in a single month, transportation and warehousing prices rose 3.4% month-on-month, and several subcategories displayed strong price pressures, indicating that production-side costs continue to carry risks of passing through to downstream consumer segments.

After the release of the CPI data, BofA raised its September core PCE month-on-month forecast by 10 basis points, from about 0.22% to 0.32%. Core PCE is the Fed's preferred inflation reference when formulating monetary policy, and the upward revision of this forecast directly supports BofA’s call for a rate hike in October.

BofA maintains its previous stance—the FOMC meeting in October should deliver another rate hike. According to the report, the bank believes that the current data landscape is clear enough that further waiting would risk sending the wrong signals.

In upcoming economic data releases, the market will also pay attention to September retail sales and statements from several Fed officials, including Fed's Goolsbee, Hammack, as well as the conversation between Warsh and IMF Managing Director Georgieva. These comments may further affect market pricing for the rate hike path.