Bank of America is not worried about the impending consequences of stagflation, and said that some people's recent anxiety about the US economy is actually due to misreading the data.

In April of this year, the US GDP for the first quarter fell short of expectations, and the inflation data also surpassed expectations, triggering panic. This sounded a wake-up call for possible stagflation. Stagflation is an unwelcome development, that is, inflation continues to rise while the economy cools down. This situation may eventually be worse than the recession.

But Bank of America looked deeper into the data and found that these concerns were unfounded. It is based on the 2022 stagflation period, when the post-pandemic supply shock far exceeded demand, and the inflation rate rose sharply.

“The decline in GDP is being driven by trade and inventories, and consumer spending associated with PCE inflation has been strong for 4 out of the past 5 months,” the bank said in a report on Thursday.

In other words, the catalysts for the current round of US inflation are different and less ominous because they are demand-driven. Of course, inflation is rising, but this is because consumers are strong, and this usually doesn't happen during periods of stagflation.

The report highlights several possible factors driving this trend. These factors include an increase in total income from an expanding workforce, and people's willingness to spend more on services as commodity prices continue to fall. Bank of America does not expect the current trend to weaken in the short term, saying “the overall pattern of flexible spending growth should not change.”

Furthermore, the bank notes that demand-driven inflation actually makes it easier for the Federal Reserve to evaluate future policy paths. Bank of America said that although supply shocks often put the Federal Reserve in trouble, the Federal Reserve actually welcomes disruptions in demand because they can effectively deal with disruptions in demand through monetary policy decisions.

However, J.P. Morgan CEO Dimon said that huge price pressure is still affecting the US economy, which may mean that interest rates will remain high for a longer period of time than many investors expect. He said, “A lot of inflationary forces are right in front of us.”

Dimon cites the costs associated with the green economy, infrastructure spending, and huge fiscal deficits. However, he said that geopolitics may be a decisive factor in dominating the economy next year. Dimon has been warning for months that inflation may be more stubborn than many investors have predicted, and wrote in an annual letter to shareholders that J.P. Morgan is ready to accept interest rates of 2% to 8%, “even higher.”