Wall Street has spent this year waiting for prices to calm down. The thinking was simple. The war with Iran pushed oil up in February; the shock would wear off, and the Fed would go back to cutting rates.
One of the banks that sold that idea has changed its mind.
Wells Fargo is not a gloomy voice on the U.S. economy. In June, its equity strategists raised the year-end target for the S&P 500 to 7,950 from 7,300, lifting its earnings forecast for the index, according to TheStreet.
The people who forecast prices there are far less cheerful. Their new numbers say the long slide in inflation everyone counted on is running out of road.
Wells Fargo raises its inflation forecast and now expects a rate hike
Wells Fargo has lifted its inflation forecasts for 2026 and 2027, and now expects the Federal Reserve to raise rates by a quarter point before the year is out. The investment institute previously expected the Fed to remain on hold this year and in 2027, according to Reuters.
Costlier energy, new tariffs, and supply chains that still do not run smoothly are behind the change.
The bank’s own June targets show what that shift is up against. The Wells Fargo Investment Institute had inflation ending this year at 3.4%, easing again in 2027, while expecting the Fed funds rate to remain at 3.50% to 3.75%.
Those targets assumed the worst was over. The forecast now coming from the bank’s economists does not.
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Cheaper energy should still bring most of the relief next year. After that, the bank sees the path go flat. Everyday services stay in demand, and the huge spending on artificial intelligence keeps pushing up what companies pay for workers, materials, and building work.
That last part worries the bank because it does not fade on its own the way fuel prices do.
This is a quick change of heart. In May, that same team still expected two rate cuts, arguing the oil shock was temporary and that a weaker summer job market would force the Fed’s hand. Then Kevin Warsh took over as chair, made clear he wants inflation down, and the cuts came out of the forecast.
In their place is the prospect of a rate hike before year-end.
July inflation looked better than it was
July did not look like a month to worry about. Annual inflation slipped to 3.4% from 3.5%, and core prices, which leave out food and fuel, came in at 2.5%, according to NBC. Traders promptly cut the odds of a September rate rise to 42%. On the face of it, the cooling was on track.
Look under the headline, and energy is still expensive. Energy prices in July sat 14.7% above where they were a year earlier, the BLS confirmed. Housing costs, the one thing meant to bring steady relief, did most of the work in the monthly rise.
Households can feel it. Inflation is running ahead of wage growth of 3.2%; hourly pay has been going backward once rising prices are stripped out, and with regular gasoline back around $4 a gallon in August, nothing at the pump feels cheap.
Wells Fargo keeps coming back to that gap. Set against last year’s high prices, this year’s figures look tame, and the items doing most of that work are the ones that swing about anyway. Two calm months in a row are not much to build on.
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Oil, tariffs, and the electricity cost of the AI boom
Oil comes first. Ships barely move through the Strait of Hormuz, and the International Energy Agency forecasts that global oil demand will decline by 1.6 million barrels a day in 2026, according to CNBC.
The Gulf has also kept crude above where it sat before the war. Tariffs are the more persistent of the two pressures. Oil can drop back within weeks once shipping lanes reopen. Once tariffs are on, they sit in the price of every imported item until the government takes them off.
The bank treats that cost as something the economy continues to carry, rather than something it shakes off.
Then there is the electricity bill behind the AI boom. PJM, which runs the power grid across much of the eastern United States, released results of a power auction showing that data centers would add approximately $6.3 billion in costs to households and businesses over the next three years, according to Fast Company.
Power is the visible part of a bill that Wells Fargo says also runs through wages, materials, and construction.
Put the three side by side, and one thing still stands out. Higher interest rates do not open a shipping lane, cancel a tariff, or build a power station.
The Fed can either accept that prices take longer to come down or keep rates high for a longer period of time. Warsh has not sounded like a man who will pick the first, and Wells Fargo has written that into its forecast.
What this means for the Fed and for investors
The July meeting showed how split the room is. Rates were held for a fifth meeting in a row, but three officials voted against it and wanted a quarter-point rise: Beth Hammack of Cleveland, Neel Kashkari of Minneapolis, and Lorie Logan of Dallas, CNBC reported. No one on the committee dissented in favor of a cut.
Investors did not treat the hold as good news. The vote came with no hint about the next move; stocks sold off, and long-term Treasury yields were pushed higher. Wells Fargo is not the only bank shifting. Michael Feroli, chief U.S. economist at J.P. Morgan, now expects a rise in December.
For anyone holding assets that do well when rates fall, the question has changed. It is not about when the cuts start. It is about whether the long slide in prices that followed the pandemic has ended, leaving high rates as the normal setting for this cycle.
Long-dated bonds, heavily indebted companies, and rate-sensitive shares turn on the answer. Wells Fargo has picked its side, and the next few inflation and jobs reports will show whether it was right.
Related: UBS sends strong verdict on food inflation, economy