Why the US isn't facing a stagflation threat even as growth slows, according to BofA

The firm says inflation is being driven by a strong consumer, which makes the current situation less perilous than past stagflation threats.

• Recent stagflationary forecasts are misguided for this year, Bank of America wrote on Thursday.
• While first-quarter GDP badly missed estimates, the inflation that was seen was driven by strong consumer spending.
• That separates it from the US's last bout with stagflation, in 2022, when higher prices were caused by a supply shock.

Bank of America isn't worried about looming stagflationary fallout, and says recent anxiety around the dangerous economic scenario was based on misread data points.

Fear arose in April when first-quarter GDP missed expectations as inflation figures simultaneously surpassed estimates. This set off alarm bells around possible stagflation, an unwelcome development where prices keep rising amid an economic cooldown — and a situation that can ultimately be worse than recession.

But Bank of America has delved deeper into the data and found that these fears aren't warranted. It uses a stagflationary period in 2022 as a basis for comparison — a period when inflation rose because of a post-COVID supply shock that far outpaced demand.

"It is based on an apples-to-oranges comparison," the bank said in a Thursday note. "The miss in GDP was driven by trade and inventories. Consumer spending, which is related to PCE inflation, has been robust in four of the last five months."

In other words, the catalysts for inflation are different and less ominous this time around, because they're driven by demand. Sure, inflation is rising, but it's doing so because consumers are strong, which isn't normally the case during a stagflation period. 

Fueling the trend are a few possible factors, the note highlighted. They include rising aggregate income from an expanding labor force and increased willingness to spend on services as goods continue to deflate.

BofA doesn't expect the current trend to abate any time soon, saying "the big-picture story of resilient spending growth should remain unaltered."

Further, the firm notes that demand-driven inflation actually makes the Fed's job easier as it assesses 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, as they are easier to effectively combat through monetary-policy decisions, BofA said.