Citi bank warns consumer strength could lift inflation outlook

Citigroup’s Benjamin Wiltshire, a rates trading desk strategist, said the market’s prevailing confidence that inflation will continue to fade may be leaving investors under-positioned for an upside surprise. In the note, Wiltshire said the consumer appears more resilient than markets are pricing, and he argued inflation expectations could be nudged higher from current levels, making inflation-upside protection look inexpensive.

The warning lands as rates markets have already been recalibrating around US data. A stronger-than-expected January jobs report reduced expectations for near-term Federal Reserve easing, with futures markets leaning toward two rate cuts by year-end and the first move most commonly priced around mid-year. The attention in rates has shifted quickly to inflation data, including the next US CPI print.

In practical terms, Citi’s desk is pointing at a positioning gap: investors have leaned into the idea that disinflation will keep progressing while policy rates drift lower, but a modest rebound in inflation prints or a re-acceleration in inflation-sensitive categories could force investors to pay up for protection or unwind trades built around a smooth path back to target. The desk’s framing centers on asymmetry: if inflation runs a bit hotter than expected, the adjustment in inflation expectations could be sharper than the market is prepared for.

Macro pricing over the past week has reflected the same tension. On the one hand, risk assets have remained broadly supported, and global markets have been upbeat even as rate-cut expectations have been pared back. On the other hand, the rates complex has been sensitive to any data that supports the Fed’s “higher for longer” posture, particularly given the backdrop of heavy Treasury supply and ongoing debate over the path of longer-dated yields through 2026.

Citi’s message also dovetails with recent caution from policymakers about declaring victory on inflation too early. Kansas City Fed President Jeffrey Schmid said on Feb. 11 that it is premature to count on productivity gains to solve still-elevated inflation and argued the Fed should maintain a tight stance while demand continues to outstrip supply. That kind of rhetoric raises the bar for rapid easing and keeps the market’s inflation sensitivity high into the next inflation releases.

For traders, the near-term calendar matters because it determines when “calm” inflation pricing gets tested. Aside from CPI, markets are watching weekly jobless claims and the US Treasury’s auction schedule, including longer-maturity supply that can influence term premium and the level of real yields. Reuters’ global markets view on Feb. 12 highlighted jobless claims and a 30-year bond auction among the key events in focus.

The broader macro debate is also being shaped by cross-currents in growth and consumer behavior. Citi’s strategist is explicitly leaning against the idea that the consumer is rolling over fast enough to guarantee a clean glide path for inflation. If consumption holds up, firms may retain pricing power longer than expected, and wage-sensitive service categories could prove sticky, raising the probability that inflation prints surprise to the upside even without a major demand re-acceleration.

At the same time, the market is navigating competing narratives: some investors see restrictive policy and easing goods pressures as enough to keep inflation trending down, while others focus on stickier components and the risk that the last mile to 2% is uneven. Citi’s call fits into the latter camp, arguing that the distribution of outcomes is not as benign as current pricing implies, and that optionality around higher inflation may offer better value than the market is acknowledging.

Outside the rates desk note, Citigroup management has also been emphasizing a still-healthy consumer backdrop. Citi’s incoming CFO Gonzalo Luchetti said on Feb. 11 that the bank remains optimistic about the resilience of the US consumer early in the year, a view that aligns with the desk’s argument that demand may be sturdier than the market assumes.

The next leg for rates markets will likely be decided by whether upcoming inflation data confirms the “calm” narrative or forces a rethink. Citi’s rates desk is effectively arguing that the market’s confidence has gotten ahead of the evidence, and that even a modest inflation re-pricing could matter because so many trades depend on a stable decline in inflation and an orderly path to Fed cuts.