There are no signs of stagflation, Bank of America Securities analysts said in a note to clients on Friday.
The bank, reacting to the latest PCE inflation data for March, said the figures were good but not as bad as feared after the big surprise rise in the quarterly data.
Headline and core PCE inflation stood at 0.32% month-on-month in March. BofA had forecast growth of 0.25%, but analysts were braced for a surprise rise after a significant improvement in yesterday’s Q1 inflation data.
The bank also highlighted other factors such as continued rising spending, a further decline in the savings rate and Thursday’s GDP data showing a lack of growth.
Analysts noted that the lag of GDP behind PCE inflation created the impression of stagflation or a negative supply shock. However, they believe this view is flawed because it is “based on comparing apples and oranges.”
“The lack of GDP was driven by trade and inventories,” BofA said. “Consumer spending linked to PCE inflation remains resilient. Instead, we believe 1Q24 data is in line with forecasts [an] accelerating demand, especially for services.
“One explanation is that demand has increased as a consequence of income generated by the ongoing positive labor supply shock due to strong immigration and labor force participation.”
When it comes to a potential rate cut, analysts explain that while the inflation data wasn’t as bad as it could have been, there’s nothing positive for the Fed.
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“Inflation is too high for comfort,” they argue. “The fact that the data corresponds to strong demand rather than a supply shock makes the Fed’s decision easier: both of its mandates suggest that cuts remain off the table for now.”