Key insights
- BofA weighs stagflation risk given elevated inflation data. Strong consumer spending and earnings suggest reflation, but fading fiscal stimulus poses a risk. Hotter-than-expected April CPI data reinforces concerns. BofA expects hawkish FOMC minutes and no Fed rate cuts this year, pushing back rate cut forecasts to 2027. Persistent inflation and geopolitical risks are key concerns, suggesting a bearish outlook for equities due to potential for tighter monetary policy.
Investing.com - Bank of America economists said Friday the jury is still out on whether the U.S. economy faces stagflation or reflation as supply and demand shocks buffet growth and inflation remains above target.
Economist Aditya Bhave wrote that resilient consumer spending and booming corporate earnings point to reflation, but the true test of consumer and labor resilience may still lie ahead as fiscal tailwinds fade. April inflation data came in hotter than expected, with core CPI rising 0.4% month-over-month and headline CPI reaching 3.8% year-over-year, its highest level since May 2023. The data suggest core PCE likely remained firm in April at 0.28% month-over-month or 3.3% year-over-year.
April retail sales showed the consumer remains resilient despite higher gas prices, with the control group rising 0.5% month-over-month and food services increasing 0.6%. Bank of America aggregated card data showed total card spending excluding gas was up 5.8% year-over-year through the week ending May 9. The retail sales data raised the bank’s tracking estimates for first-quarter and second-quarter consumer spending growth by 20 basis points and 10 basis points to 1.8% and 2.8%, respectively.
BofA expects the FOMC minutes from the April meeting, due Wednesday, to reinforce the Fed’s recent hawkish tone. A growing number of participants are uneasy with strong inflation data and the statement’s perceived easing bias, the bank said. While downside labor risks will be noted, the focus should be on persistent inflation and upside risks from Iran.
The labor market would have to start tightening for reflation and rate hikes to become the bank’s base case, Bhave wrote. BofA no longer expects the Fed to cut rates this year and has pushed two cuts in its forecast from September-October 2026 to July-September 2027.
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