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.

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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.

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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 (NYSE: SPY) is down 5% in just three days since the inflation number was released earlier this week.

Photo: Gerd Altmann from Pixabay