Bank of America analysts are assessing whether the current U.S. economic picture is more consistent with stagflation or reflation, according to a recent note. The firm highlights a mix of persistent inflationary pressures and continued consumer resilience as central to that debate.
The note identifies resilient consumer spending and robust corporate earnings as evidence supporting a reflationary path. At the same time, analysts warn that a waning fiscal tailwind could mean the crucial test of household and labor-market strength is yet to come. In their view, a shift to reflation as the base case - and a higher likelihood of further interest-rate increases - would require a tightening in the labor market.
April's consumer-price data reinforced the inflation concerns. Core Consumer Price Index rose 0.4% month-over-month in April, led by shelter, which increased 0.6% month-over-month. Core services excluding housing also climbed 0.5% month-over-month. Headline CPI reached 3.8% year-over-year, the highest reading since May 2023, with higher energy and food prices contributing to the advance.
On the Bank of America estimates, core Personal Consumption Expenditures likely remained firm in April, with a month-over-month increase of about 0.28% and a year-over-year rise of roughly 3.3%.
Retail-sales data for April underlined the consumer sector's resilience despite higher gasoline costs. The control group - the measure most closely tied to GDP and consumer-driven domestic demand - rose 0.5% month-over-month, while food services spending increased 0.6% month-over-month.
Upward revisions to the prior two months' data lifted Bank of America's tracking estimates for consumer spending to 1.8% for the first quarter and 2.8% for the second quarter, increases of 20 basis points and 10 basis points, respectively.
Aggregated card data compiled by Bank of America through the week ending May 9 showed total card spending excluding gasoline was up 5.8% year-over-year, a further signal of ongoing consumer activity.
Bank of America's analysis thus places the economy at an inflection point: sustained consumer demand and corporate earnings point toward reflation, but the persistence of shelter and services inflation, together with rising energy and food costs and a diminishing fiscal boost, leave open the risk of stagflation unless labor-market tightening materializes.
Context note - The bank's conclusions hinge on the interaction between consumer resilience, price dynamics across shelter and services, and whether the labor market begins to tighten further.