‘Stagflation is here,’ following months of rising prices, BofA analysts say

“…Stagflation is a word that conjures up images of 1970’s era double-digit inflation and long gasoline lines, so analysts have been loathe to use it. It’s a scenario that’s basically the worst of all worlds for the average person because it causes real incomes to stagnate or decline while destroying purchasing power.

The scenario currently being articulated by various banks like BofA is more of a stagflation-lite outcome, where inflation doesn’t need to necessarily shoot up much higher from here but lingers for far longer than previously thought.

Vamvakidis says he envisions a scenario where U.S. inflation keeps surprising to the upside and economic growth surprises to the downside, relative to expectations. The core PCE index could stay above 3% into 2022, he says, leaving inflation high enough that the Fed and other central banks might need to tighten monetary policy more than expected at a time when output is weaker and risk asset prices may be volatile. Meanwhile, analysts at in London see an era of higher inflation in the U.S. that lasts for a decade.

“We could easily see inflation at 3% to 4% for a while,” said Gang Hu, managing partner of New York hedge fund WinShore Capital Partners, who trades global inflation-protected securities. “We are not at the end of this supply-side destruction and are entering a period where nobody knows what transitory inflation means.”

“Once this episode passes, I don’t rule out a chance of a prolonged period of deflation” as policy makers “overshoot on the other side,” Hu told MarketWatch Friday. “For now, the market has not lost its confidence in the central bank’s ability to control inflation.”…”