Fed, BoE and ECB Signal December Hikes as Inflation Runs Hot

Traders put the odds of a Federal Reserve rate hike on Dec. 8-9 at about 90%, and investors price roughly a 70% chance the Bank of England follows with a quarter-point increase to 4.25% on Dec. 17. Officials at the Fed, the BoE and the European Central Bank are signaling more increases after inflation data on both sides of the Atlantic came in hot. For US and European borrowers, from mortgage holders to governments, the direction points to higher financing costs into 2027.

What did the US inflation data show?

US consumer prices rose 4% in October from a year earlier, up from 3.7% in September, AP reported. Price increases are spreading beyond gasoline and tariffed goods into services and electronics. Smartphone prices rose 1.4% from September to October, the largest monthly increase on record; televisions rose 3.3% and computers 0.5%, reversing their usual declines.

Dallas Fed President Lorie Logan, a voter this year, pointed to doctor visits, childcare, dining out and hotel stays. She also flagged AI data-center spending, which is pushing up prices for chips, power-generation equipment and copper. Logan wants at least two more quarter-point hikes and said the Fed could "move more rapidly this winter."

Her colleagues split on pace rather than direction. Governor Christopher Waller had said a half-point increase should be considered if October core inflation reached 0.3%, and it did. Philadelphia Fed President Anna Paulson prefers a gradual path. Chair Kevin Warsh has declined to say whether more increases are likely. The odds of a second hike in January rose above 64%.

Goldman Sachs now expects hikes in December and March 2027, taking the federal funds rate from 3.75%-4% to a peak of 4.25%-4.5%.

How firm is the Bank of England's next move?

The BoE raised Bank Rate to 4% last week, its first increase since 2023. Monetary Policy Committee member Megan Greene wrote in the Financial Times that it is appropriate to "proactively tighten our monetary policy stance" to keep wage growth from getting stuck at high levels and firms from passing those costs on. Her forward-looking measures suggest pay growth will settle at or above 3.5% over the coming year, above the pace consistent with 2% inflation.

"We don't have as much slack as we thought and it may already have peaked," Greene wrote.

The National Institute of Economic and Social Research went further in its autumn outlook, urging the BoE to raise rates to 5% and calling the Bank "behind the curve." NIESR said a single further hike would bring inflation back to target only in about four years, and warned inflation may not return to 2% until 2030 on the current path. About three quarters of UK workers will settle pay in the first three months of next year, when NIESR expects inflation to peak above 4%.

NIESR's chief economist, James Smith, warned the Bank risks falling further behind and then having to raise rates sharply. The think tank estimates rates rising to 4.75% would cut about 0.4 percentage point from UK GDP growth in 2028 and 2029. Deputy Governor Clare Lombardelli said last week that, absent evidence of weaker inflation pressure, "there is likely to be a case for a further increase in rates," and did not rule out a back-to-back move in December. UK households also face a possible rise of about a quarter in gas and electricity bills in January when the energy price cap resets.

Is a December ECB hike already settled?

The ECB held its deposit rate at 2.5% in late October after two hikes this year. Bundesbank President Joachim Nagel told Bloomberg TV it is "rather obvious that we have to increase in December." He called the drop in energy prices since the US midterms "good news" but said market expectations are "not [the] driving factor." A week earlier he had called a December hike "very likely necessary," noting inflation was nearing the ECB's "adverse" scenario, with the bank projecting inflation above 4% in the coming months.

ECB chief economist Philip Lane told Bloomberg TV it would be "prudent" to raise rates if the data do not shift before the December meeting. Traders expect at least one quarter-point ECB increase by February 2027, Reuters reported. That backdrop did not stop the STOXX 600 from closing at a record on Wednesday.

With three central banks converging on December tightening and wage settlements due across the UK early next year, the fight against inflation now has a firm calendar — and borrowers will feel it through 2027.