Bank of America warns of "mild stagflation," with high oil prices becoming the norm for the year

Why is the global economy experiencing mild stagflation, and is the energy shock the key factor?

【Global Network Finance Comprehensive Report】According to Caixin News, Bank of America’s latest research report indicates that the global market is facing a “mild stagflation” pattern characterized by slowing economic growth and rising inflation. The bank predicts that even if the situation stabilizes in a few weeks, international oil prices will remain high around $100 per barrel for the rest of the year.

Bank of America economist Claudio Irigoyen and his team emphasized in the report that the current market is not facing a single oil supply shock but a broad “energy shock.” Although the global macroeconomy’s direct dependence on oil has decreased compared to the past, sensitivity to related energy and agricultural inputs such as natural gas and fertilizers has significantly increased. This structural change poses notable risk challenges to Europe and many developing economies.

Based on this new baseline scenario, Bank of America has comprehensively adjusted its macroeconomic outlook. The bank lowered its U.S. economic growth forecast for 2026 by 50 basis points to 2.3%, and significantly raised the full-year overall inflation expectation from 2.8% to 3.6%. From a global perspective, Bank of America lowered its 2026 global economic growth forecast to 3.1% and raised the global inflation expectation to 3.3%, with overall data characteristics consistent with a typical stagflation shock.

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Regarding monetary policy responses, Bank of America believes that the gradual cooling of the labor market and the slowdown in wage growth still leave some room for the Federal Reserve to operate in the future. The bank maintains its forecast of a 50 basis point rate cut by the Fed this year but has pushed back the timing from the previously expected summer to fall, openly stating that “the risk of being unable to cut rates is increasing.” This outlook is in line with other Wall Street institutions, with Goldman Sachs also betting that the Fed will only make two rate cuts in the fourth quarter of this year. Goldman analysts pointed out that an energy price shock sufficient to trigger sustained inflation concerns could severely damage the economy or even trigger a recession.

Regarding market volatility, Federal Reserve Chair Jerome Powell stated that, given the external disturbances to energy prices, the Fed tends to keep interest rates unchanged and choose to “temporarily ignore” such one-off shocks. This stance effectively alleviates market concerns that the Fed might be forced to raise rates in the short term to combat inflation.

However, Bank of America also issued a risk warning. The bank’s current baseline assumption is that the related conflict will gradually subside before the end of this month, but if the situation unexpectedly escalates and persists long-term, a sharp surge in energy prices combined with a deep correction in financial asset prices could directly drag the already weak global economy into recession. (Wen Xin)