August CPI to Decide Whether Fed Resumes Hikes Above 5%

The August US CPI report due September 11 will settle whether the Federal Reserve resumes rate hikes after five consecutive holds, with Bank of America Securities and Citigroup projecting opposite core inflation outcomes. BofA forecasts core CPI rising 0.22 percent month over month, a reading it argues would convince Chair Kevin Warsh that inflation remains insufficiently controlled. Citi sees a softer 0.184 percent gain that would push the annual core rate to 2.3 percent, the lowest since April 2021.

"I stand here today committed to a discipline, not a decision," Warsh said in his August 28 Jackson Hole keynote, his first major address since taking office in May. The chair's hawkish tone — emphasizing PCE as the Fed's preferred gauge and flagging supercore PCE at 3.9 percent and rising — pushed fed funds futures to price roughly 58 percent odds of a quarter-point hike at the September 16 meeting, up from about 36 percent beforehand.

The Federal Open Market Committee has held the fed funds rate at 3.50 to 3.75 percent since December, with the July meeting splitting 9-3 in favor of holding. August nonfarm payrolls added 162,000 jobs versus 55,000 expected, with annualized wage growth at 3.1 percent, giving hawks fresh ammunition. Two-year Treasury yields rose 9 basis points after Warsh's speech, while the S&P 500's Shiller price-earnings ratio sits above 42 times, a level historically associated with late-cycle stress.

The September 11 CPI print is the decisive input to the September 16 decision. If core inflation lands near BofA's 0.22 percent forecast, the committee could push rates above 5 percent, deliberately inverting the yield curve and compressing equity valuations. If Citi's 0.184 percent projection holds, most officials may find enough evidence of disinflation to hold steady.

Waller's Threshold Shapes the Vote

Governor Christopher Waller is the key swing vote. BofA analysis puts Waller's implied threshold at core PCE rising more than 0.30 percent month over month to earn his support for a hike; BofA's own core PCE forecast of about 0.24 percent sits below that line. Yet the firm argues that Warsh's Jackson Hole signal has lowered the bar for another increase, and that a committee majority could still form if the data broadly matches expectations. Citi takes the opposite view: after Waller's recent comments, the market's bar for what counts as "too hot" inflation has moved higher, and any reading that rounds to 0.2 percent month over month would be mild enough for most officials to justify a pause.

The forecast divergence stems from structural differences between CPI and PCE. Housing carries roughly one-third of the CPI basket weight, while PCE assigns it significantly less. Falling shelter costs have been the main driver of core CPI's decline over the past year, widening the gap between the two gauges. PCE also assigns higher weight to healthcare and includes Medicare, Medicaid, and employer-paid medical spending, whereas CPI measures only consumer out-of-pocket costs — so rising medical expenses are pushing core PCE and especially supercore PCE higher. Cleveland Fed nowcasts show core CPI falling to 2.3 percent in September, near the Fed's target, while core PCE rises to about 3.5 percent. Warsh confirmed at Jackson Hole that PCE is the Fed's preferred policy gauge, with particular attention to supercore PCE — services inflation excluding energy and housing — which has climbed to 3.9 percent and is still rising, reflecting wage-driven services price pressure.

Energy and Jobs Bolster the Hawkish Case

Both BofA and Citi expect energy prices to rebound in August after months of declines, lifting headline CPI to a 0.34 to 0.37 percent month-over-month gain and pushing the annual rate above July's 3.4 percent. Middle East tensions persist, the Strait of Hormuz has not returned to normal transit, and global oil inventories continue to draw down. A sharp energy spike would not only lift headline inflation but could transmit through wage-price dynamics into core measures, strengthening the case for tighter policy.

The August jobs report, released after Waller's comments, complicates the wage-inflation assessment. Payroll growth of 162,000 far exceeded the 55,000 consensus, and annualized wage growth of 3.1 percent gives the Fed's hawks additional cover. Warsh has said wage growth "has not proven a reliable indicator of future inflation for a very long time," but the strong labor market nonetheless reduces the cost of another hike.

For equity investors, the stakes are elevated. The S&P 500's Shiller P/E above 42 times sits in bubble territory by historical standards, fueled by the AI capital expenditure boom. If the Fed is forced onto a more aggressive tightening path that pushes rates above 5 percent and deliberately inverts the yield curve, U.S. equities face significant multiple compression risk. BofA argues that even if the August CPI composition does not trigger major alarm, it is unlikely to give the committee sufficient reason to delay. The September 11 release is the most consequential test of Fed policy direction in the current cycle.

This article is for informational purposes only and does not constitute investment advice.