Bank of America economists said Friday that it remains unclear whether the U.S. will slip into stagflation or continue toward reflation as competing supply and demand shocks influence growth while inflation stays above target.
Economist Aditya Bhave noted that robust consumer spending and strong corporate profits are signals consistent with reflation. However, he warned the full test of household and labor resilience could be forthcoming as fiscal supports diminish.
April inflation readings arrived hotter than expected. Core CPI climbed 0.4% month-over-month and headline CPI rose to 3.8% year-over-year, marking its highest reading since May 2023. Based on those figures, Bank of America said core PCE likely remained firm in April at an estimated 0.28% month-over-month, or 3.3% year-over-year.
Consumer activity through April also showed strength. Retail sales indicated the consumer remains resilient despite higher pump prices, with the control group up 0.5% month-over-month and food services increasing 0.6%. Aggregated card data from Bank of America found total card spending excluding gas rose 5.8% year-over-year through the week ending May 9.
Those retail metrics led the bank to revise its tracking estimates for consumer spending growth higher - adding 20 basis points to first-quarter growth and 10 basis points to second-quarter growth, lifting the estimates to 1.8% and 2.8%, respectively.
Turning to monetary policy, Bank of America expects the minutes from the April Federal Open Market Committee meeting, due Wednesday, to reinforce the Fed's recent hawkish tone. The bank said a growing contingent of FOMC participants is uneasy with the strength of inflation data and with any perceived easing bias in the policy statement. While the minutes should acknowledge downside labor risks, BofA expects the emphasis to be on persistent inflation and upside risks linked to Iran.
Bhave wrote that for reflation and renewed upward pressure on rates to become the bank's baseline outlook, the labor market would need to begin tightening. Reflecting the changing outlook, Bank of America no longer expects the Federal Reserve to cut rates this year and has moved two projected cuts in its forecast from September-October 2026 to July-September 2027.
Context limitations - The bank's analysis points to competing indicators and highlights uncertainty about the durability of consumer and labor strength as fiscal support wanes.