Morgan Stanley Raises US Inflation Forecasts on Oil Spike
Morgan Stanley revised its US inflation outlook upward, citing persistent energy costs. The bank now projects core PCE inflation at 3.2% for the current year.
Morgan Stanley raised its year-end projection for core personal consumption expenditure inflation to 3.2%. This estimate exceeds the previous forecast of 3.1%. The bank attributes the revision to sustained high oil prices. These costs are slowing the decline toward the Federal Reserve's 2% target. Headline PCE inflation is expected to remain at 3.7% through year-end. Core inflation is projected to drop to 2.7% next year. This is a significant increase from the prior estimate of 2.4%.
Michael Gapen, Chief US Economist at Morgan Stanley, described inflation as stickier than expected. He noted that deceleration is occurring but at a slower pace. Tighter financial conditions are also limiting the broadening of economic expansion. The Fed hiked rates on Wednesday for the first time in over three years. The central bank signaled another increase later this year. This move aims to anchor price expectations.
Energy Costs Drive Price Pressure
Crude oil prices rallied this month due to Middle East hostilities. US diesel prices hit record highs on Friday. Gapen warned that unresolved conflicts may lead firms to treat high input costs as permanent. This could trigger broader pass-through into core prices. Such effects are likely to emerge in early 2027. This timing aligns with typical annual price resets after the holiday season.
Rate Hikes Expected Through March
Morgan Stanley forecasts two additional 25 basis point rate hikes. One is expected in December and another in March. Deutsche Bank and Macquarie Group hold similar views. They also project 50 basis points of total increases within six months. Policy rates will likely remain elevated throughout 2027. Meaningful cuts are deferred until inflation shows sufficient progress. Gapen sees potential for cuts as early as the fourth quarter of 2027. However, current data does not yet support this timeline.
Growth Forecast Lowered Amid High Rates
The bank lowered its US economic growth estimate to 2.3% for next year. The previous figure was 2.6%. Higher oil prices and interest rates are curbing consumer spending. Financial conditions have tightened. Despite these headwinds, Gapen stated that underlying domestic demand remains stable. There is no indication of a material weakening in the broader economy. The source notes that inflation progress is hampered but not reversed.
