Inflation has proven that it’s persistent, and a deep recession is required in order to tame the high prices, according to Bank of America.
In a Friday note, the bank’s analysts noted that market pricing suggests that inflation will plunge to or below the 2% target in about twenty-four months, but the economy will 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 noted that inflation expectations will also be difficult to drive down, while markets are largely ignoring economic history, meaning that the current 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.”
