Citibank Sees US Interest Rates Hitting 5.50-5.75% and Persistently Tight Labour Market

Analysts at US Citibank see the 1.2 percent quarterly rate of the U.S. labor cost index in the first quarter as a sign that there has been little relief from the underlying driver of excessive inflation, a tight labor market that pushes up labor costs and then passes them on to higher prices. Since growing at about 1.2% in the third quarter of 2021, the labor cost index has remained in the 1.1% to 1.4% quarter-on-quarter range, a reminder to Fed officials that the high inflation is not transitory in nature. A very simple model shows a clear relationship between employment costs and future service price increases, and suggests that core non-housing services inflation in the CPI will still be above 5% a year from now. That should frustrate Fed officials. Persistently higher than expected inflation is the underlying reason why we expect continued rate hikes this year, with the federal funds rate expected to reach 5.50 to 5.75%.