BofA and Citi Diverge on August CPI Forecasts, September Rate Hike Path Remains Uncertain
nashnova research
BofA and Citi's August core CPI forecasts differ by just ~0.04 percentage points, yet that gap points to opposite September rate-hike conclusions — with the Fed's hawks and doves evenly matched, one CPI print may decide the direction of rates.
What exactly are the two banks arguing about?
BofA forecasts August core CPI at +0.22% m/m, implying core PCE of roughly 0.24% and a year-on-year rate of 3.4%. BofA believes this is enough to convince Fed Chair Warsh that inflation is not yet under control — supporting another hike.
Citi forecasts core CPI at just +0.184% m/m, with the annual rate falling to 2.3% — if correct, that would be the lowest since April 2021. This means → most officials would lean toward holding rates steady.
In plain terms = both banks are grading the same exam paper. BofA says "fail — retake needed." Citi says "barely passing — let it through." A tiny gap, opposite verdicts.
Why does Waller's single vote carry so much weight?
Hawks and doves inside the Fed are nearly evenly split. Governor Waller is seen as the swing vote. He told Reuters: "If inflation continues making progress toward our 2% target, I am prepared to support keeping the policy rate unchanged."
BofA's read: Waller's implicit threshold is core PCE m/m of 0.30% — only above that would he vote to hike. BofA's forecast of 0.24% sits below the line.
Yet BofA also notes that Warsh sent a clearly hawkish signal at Jackson Hole, effectively lowering the bar for a hike, while New York Fed President Williams and Waller lean dovish. This means → even with soft data, if Warsh pushes hard enough, the committee could still assemble a majority for a rate increase.
Why are CPI and PCE telling different stories?
Housing accounts for roughly one-third of the CPI basket but carries significantly less weight in PCE. Over the past year, cooling shelter inflation pulled CPI down without equally dragging PCE — the core reason the two gauges are diverging.
PCE assigns higher weight to healthcare and includes Medicare, Medicaid, and employer-paid medical spending (CPI captures only out-of-pocket costs). Rising medical costs are pushing core PCE higher.
The Cleveland Fed's Inflation Nowcast shows core CPI falling further to 2.3% in September while core PCE climbs to roughly 3.5%. In plain terms = two thermometers on the same patient, measuring different spots — one reads cooler, the other hotter, and the prescription depends on which one the doctor trusts.
What ammunition do jobs and energy hand the hawks?
August nonfarm payrolls came in at 162,000 — far above the 55,000 consensus — with annualized wage growth at 3.1%. This data landed after Waller's dovish comments. This means → the Fed must reassess wage-inflation dynamics with new evidence in hand.
On energy, both BofA and Citi expect August fuel prices to rebound after months of declines, lifting headline CPI m/m to roughly 0.34%–0.37%. Middle East tensions persist, the Strait of Hormuz has not fully reopened, and global oil inventories continue to draw — three forces pressing simultaneously.
What does the worst case look like?
Some analysts warn: if CPI surprises hot, on top of supercore PCE — PCE services inflation excluding energy and housing — already at 3.9% and rising, plus strong payrolls, the Fed may be forced to push rates above 5% and actively invert the yield curve.
The S&P 500's Shiller P/E ratio already exceeds 42×, near historical extremes. This reflects a market that has not fully priced in a more aggressive tightening path — any upside surprise on rates would put significant downward pressure on equities.
When will the final answer actually arrive?
The September 11 CPI release is the first hurdle, but Citi flags additional uncertainty around August PCE data — the Fed has made methodological changes to several key sub-components, making the usual CPI-to-PCE mapping less reliable this month.
On top of that, five years of historical PCE data face revision, expected to lower core PCE's annual rate by over 30 basis points to around 3.0%. This means → even after the CPI print gives the market a first read, the full picture may not emerge until the PCE release at month-end.
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