Only a deep recession can bring down high inflation: Bank of America - Markets Insider

Inflation has proved anything but transitory, and it's going to take a deep recession to tame the sticky high prices, according to Bank of America.

In a Friday note, the bank's analysts said market pricing implied inflation would fall to or below the 2% target in about two years but that the economy would need to see a severe downturn to achieve that.

"What seems to be forgotten here is that inflation is a sticky, slow moving variable," analysts led by Ethan Harris wrote. "Spikes can reverse quickly, but underlying inflation tends to move in a gradual lagged fashion with respect to the economy. It is going to take time to cool off the labor market and even more time to lower labor cost-driven inflation."

The analysts said inflation expectations would also be difficult to drive down, while markets were largely ignoring economic history, meaning that the outlook isn't based on what's happened before.

"The market is not a good gauge of inflation expectations for 'real people' and investors have an oversimplified view of the link between growth and inflation," Harris wrote. "In our view, it is going to be extremely hard for the Fed to get inflation back to target in a two-year time span."

The scenario described in the Friday note differs from Bank of America's official forecast, which says that the economy will see a sharp slowdown with a risk of a mild recession but the Fed won't be aggressive enough to reach the 2% inflation mark within two years.

Meanwhile, Friday's strong jobs report from the Bureau of Labor Statistics showed nonfarm payrolls increased by 372,000 in June, well above expectations. That paves the way for the Federal Reserve to carry on with more aggressive rate hikes as it prioritizes its battle to fight inflation over growth concerns.

Deutsche Bank's latest client survey found that 90% of respondents expected a US recession by the end of next year, which was up from 35% of respondents in December, according to Bloomberg.

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Only a deep recession can bring down high inflation: Bank of America - Markets Insider
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