U.S. Economy Not Facing Stagflation, Even As Inflation Rises and GDP Slows, BofA Says

But Bank of America dug deeper into the data and found those fears were unwarranted. It uses a period of stagflation in 2022 as a basis for comparison – a period in which inflation rose due to a post-COVID supply shock that far outpaced demand.

“This is based on an apples-to-oranges comparison,” the bank said in a note published Thursday. “The decline in GDP is driven by trade and inventories. Consumer spending, which is linked to PCE inflation, has been robust in four of the past five months.”

In other words, the catalysts for inflation this time around are different and less threatening, because they are demand-driven. Sure, inflation rises, but it does so because consumers are strong, which is not normally the case in times of stagflation.

A few possible factors are fueling this trend, the note points out. These include rising overall income resulting from an expanding labor force and an increased willingness to spend on services as goods continue to deflate.

BofA doesn’t expect the current trend to abate anytime soon, saying “the overall picture of resilient spending growth is expected to remain unchanged.”

Additionally, the firm notes that demand-driven inflation actually makes the Fed’s job easier when assessing the path of future interest rate hikes. While supply shocks tend to “muddy the waters” for the Fed, the central bank actually welcomes demand disruptions because they are easier to combat effectively through monetary policy decisions, said the BofA.