Oil prices may keep inflation elevated, bank economists say

• Key insight: The top economists at 12 large and regional banks said inflation will persist for several more months, due partly to the Iran war, which is expected to push up oil prices.
  
• Supporting data: The panel predicted that inflation will peak at 2.8% during the second quarter before cooling off somewhat during the back half of the year and throughout 2027.
  
• Forward look: The outlook, which was published on the same day that the U.S. Labor Department shared its latest jobs report, calls for a 4.5% unemployment rate this summer.

On the same day that the latest U.S. jobs report cast serious doubt on the health of the labor market, bank economists predicted that elevated inflation will persist through at least the middle of the year, driven partly by an anticipated surge in oil prices as a result of the war in the Middle East.

The American Bankers Association's Economic Advisory Committee expects inflation to remain above the Federal Reserve's 2.0% target for the next eight quarters, it said Friday. But the 12-member panel did predict some improvement over time, with personal consumption expenditures inflation, the Fed's preferred measure, peaking at 2.8% during the second quarter of this year before cooling off to 2.2% by late 2027.

In making its prediction, the committee viewed higher oil prices as "an anticipated risk," due to the Iran war, it said in a press release. It expects one interest-rate cut of 25 basis points between now and early next year, with the Federal Open Markets Committee leaving the federal funds rate between 3.25% and 3.50%.

The economists' latest forecast doesn't take into account Friday's weaker-than-expected jobs report because the group met one day prior to the release of the jobs report, Beth Ann Bovino, committee chair and chief economist at U.S. Bank, told reporters.

Friday's employment report showed a decline of 92,000 jobs in February, including 28,000 health care jobs. Revisions to December and January data erased another 69,000 jobs from prior employment totals, feeding concerns about sluggishness in the hiring market. 

Consensus had called for a gain of 55,000 in jobs, Scott Anderson, BMO Financial Group's chief U.S. economist, wrote Friday in a research note.

Though Bovino was unable to offer the panel's reaction to the jobs report, she did share her own thoughts in her capacity as U.S. Bank's top economist, calling the February numbers "very disappointing."

"It's hard to find a positive read in these numbers," Bovino said. "The change was pretty dramatic. We're looking at well below what the survey and what U.S. Bank was expecting."

Other economists expressed similar unease with the latest job figures. Thomas Simons, chief U.S. economist at Jefferies, said in a research note that the findings were "poor," even after taking into consideration certain one-time factors, such as winter weather slowing down the construction sector and a four-week strike at Kaiser Permanente that cut sharply into health care payrolls.

"We do not think that this is a harbinger of progressively worse jobs prints coming down the road," Simons wrote. "But the risk of a downturn has certainly increased."

Twice a year, the ABA's Economic Advisory Committee offers its take on the U.S. economy. The committee includes chief economists from large and regional banks in North America.

In its latest report, the group predicted real economic growth of 2.2% in 2026 and 2.1% in 2027. The growth forecast has brightened since September, when the group predicted economic growth of 1.8% in 2026.

While the Labor Department said Friday that the unemployment rate remains at 4.4%, Bovino cautioned that there may be "structural factors" at play that have kept the rate from rising.

She pointed to a shrinking labor supply, and noted that the smaller pool of workers could reflect more people leaving the labor force due to retirement and the ongoing crackdown on immigration under the Trump administration, leaving fewer immigrants in the U.S. workforce.

Not accounting for the latest jobs report, the bank economists said they expected the unemployment rate to peak at 4.5% during the second and third quarters of this year, and then to improve moderately to 4.3% by the end of 2027. The group forecasted some improvement in the "breadth of job growth," with Bovino saying that construction and manufacturing may experience growth as a result of the ongoing AI-driven boom in building and staffing data centers.

Inflation risk combined with fallout from the Iran war and the unfavorable jobs report could mean that the Fed will "stay on the sidelines in terms of cutting rates," Bovino said. She predicted dissents at this month's Federal Open Market Committee meeting as a result of the jobs report.

The FOMC, which is scheduled to meet in mid-March, cut rates by a total of 75 basis points between September and December, bringing the target range to between 3.50% and 3.75%. 

In January, it voted overwhelmingly to keep interest rates unchanged.