There are no signs of stagflation, Bank of America Securities analysts said in a research note to clients on Friday.
Responding to the latest PCE inflation data for March, the bank said the data was strong but not as bad as feared after the big upside surprise in the quarterly data.
Headline PCE inflation and core inflation for March were both 0.32% month-on-month. BofA forecast a rise of 0.25%, but analysts were prepared for an upside surprise after yesterday’s big jump in first-quarter inflation numbers.
The bank also highlighted other factors such as the continued rise in spending, a further decline in the savings rate and Thursday’s GDP data showing a slowdown in growth.
Analysts noted that the GDP loss and lower PCE inflation created a narrative of stagflation, or a negative supply shock. However, they think this view is misleading because it is “based on an apples-to-oranges comparison.”
“The GDP deficit was driven by trade and inventories,” BofA said. “Consumer spending, which is linked to PCE inflation, remains resilient. Instead, we consider the data for the first quarter of 2024 to be consistent with [an] acceleration of demand, especially for services.
“One explanation is that demand has risen due to income generated by the ongoing positive labor supply shock from strong immigration and labor force participation.”
When it comes to possible rate cuts, analysts explain that while the inflation numbers weren’t as bad as they could have been, there’s no upside for the Fed.
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“Inflation is too high for comfort,” they claim. “The fact that the numbers are consistent with strong demand rather than a supply shock makes the Fed’s decision easier: both mandates suggest that cuts are off the table for now.”
