Strong growth and firm inflation to prompt more hikes

The ongoing strength in AI investment should help to offset the hit to real incomes from the renewed rise in fuel prices, resulting in above-consensus GDP growth of 2.5% next year. That will lead to tighter labour market conditions and keep core inflation above 2% throughout 2027, prompting another two 25bp interest rate hikes from the Fed. Given our assumption of a major stock market correction by late next year, we have pencilled in slower GDP growth and a reversal of those hikes in 2028.