- To get inflation back down, a deep recession will have to hit the economy, Bank of America analysts wrote in a Friday note.
- High prices will be extremely sticky, and the Fed will have a tough time bringing them down in a two-year span.
- "It is going to take time to cool off the labor market and even more time to lower labor cost-driven inflation," the analysts wrote.
Inflation has proven to be 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 noted that market pricing implies that inflation will fall to or below the 2% target in about two years, 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 maintained 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."
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 revealed that 90% of respondents expect a US recession by the end of next year, which is up from 35% of respondents in December, according to Bloomberg.
