In a research note addressed to clients on Friday, analysts at Bank of America Securities reassured investors by stating that there are currently no indicators of stagflation, despite recent economic data.
Reacting to the latest Personal Consumption Expenditure (PCE) inflation figures for March, the bank noted that while the readings were robust, they did not reach the levels of concern anticipated following the significant upside surprise in quarterly data.
Both headline and core PCE inflation registered a month-on-month increase of 0.32% for March, slightly surpassing BofA’s forecast of 0.25%. However, analysts had prepared for an even greater upside surprise after the remarkable performance in first-quarter inflation data.
Bank of America highlighted several other factors contributing to the economic landscape, including continued surges in spending, further declines in the saving rate, and a recent GDP report indicating a growth miss.
Despite the narrative of stagflation emerging from the GDP miss and the beat on PCE inflation, analysts at BofA argue that this interpretation is flawed, emphasizing that it stems from an “apples-to-oranges comparison.”
“The GDP miss was primarily driven by trade and inventories,” BofA stated, adding, “Consumer spending, closely linked to PCE inflation, remains resilient.” Instead, they interpret the first-quarter 2024 data as indicative of an acceleration in demand, particularly for services.
One plausible explanation provided by analysts is that the surge in demand is a result of the income generated from a sustained positive labor supply shock, driven by robust immigration and labor force participation.
Regarding potential rate cuts, analysts assert that while the inflation data did not escalate to the extent feared, there is no cause for celebration for the Federal Reserve.
“Inflation levels remain uncomfortably high,” they contend, adding, “The data, which point towards robust demand rather than a supply shock, make the Fed’s decision straightforward: rate cuts are firmly off the table for the time being, in line with both of its mandates.”