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BofA sees no sign of 'stagflation'

Published 27/04/2024, 12:04
© Reuters.

There are no signs of stagflation, analysts at Bank of America (NYSE:BAC) Securities said in a research note to clients on Friday.

The bank, reacting to the latest PCE inflation data for March, said the reading was strong but not as bad as feared after the big upside surprise in the quarterly data.

Headline and core PCE inflation both came in at 0.32% month-on-month for March. BofA forecasted a 0.25% increase, but analysts were braced for an upside surprise after the large beat in yesterday's 1Q inflation data.

The bank also highlighted other factors, such as spending continuing to surge, further declines in the saving rate, and Thursday's GDP data showing a miss on growth.

Analysts noted that the GDP miss and beat on PCE inflation created a narrative of stagflation or a negative supply shock. However, they think this view is misguided, as it is "based on an apples-to-oranges comparison."

"The miss in GDP was driven by trade and inventories," stated BofA. "Consumer spending, which is related to PCE inflation, remains resilient. We instead see the 1Q 2024 data as consistent with [an] acceleration in demand, particularly for services.

"One explanation is that demand has risen as a knock-on effect of the income generated by the ongoing positive labor supply shock due to strong immigration and labor force participation."

When it comes to potential rate cuts, analysts explain that although the inflation data were not as bad as they could have been, there is no positive spin here for the Fed.

"Inflation is too high for comfort," they argue. "The fact that the data are consistent with strong demand rather than a supply shock makes the Fed's decision easier: both of its mandates suggest that cuts remain firmly off the table for now."

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