The ‘inflation genie is out of the bottle’ Bank of America says

“The inflation genie is out of the bottle,” the bank’s researchers wrote in a research note on Wednesday, adding that it could be a long time before it returns to normal.

The team of analysts, led by Athanasios Vamvakidis, studied cases of inflation in advanced economies above 5% from the 1980s to the 2000s. They found that, on average, it took 10 years to reduce inflation at 2%.

“Consensus still expects G10 inflation to fall to 2% in 2024, but we are concerned it could take longer,” the analysts wrote.

They added that with formidable rates around the world (the US’s year-on-year inflation rate is 8.3%, while the UK’s is 9.9%), central banks around the world “don’t have full control” of inflation and wrote that policy tightening has its limits.

“Inflation in advanced economies today is well above 5% and has not even peaked in most cases,” they wrote. “We don’t necessarily expect inflation to return to the 2% target in just a couple of years. It could take more policy tightening and more time.”

Analysts did not give an exact timetable for when they believed US inflation could be brought under control. But of the two possible scenarios, either a positive “soft landing” for the economy if interest rates fall, or a negative “hard landing” if they continue to rise and the Fed is forced to keep raising rates, the researchers offered an ominous prediction.

“Our baseline is the positive scenario, but the risks to the negative scenario are increasing in our view,” the team wrote, adding that the rest of the inflation data from the year would help them decide which scenario would unfold.

The latest inflation reading for August was down only slightly from July’s reading of 8.5%, prompting the Federal Reserve to make its third straight 75-point interest rate hike on Wednesday basic

While analysts looked at scenarios where inflation took 10 years to come down, they also offered a semi-hopeful note.

“History does not repeat itself, but it rhymes. We do not necessarily expect it to take a decade to reduce inflation to the 2% target in advanced economies,” the analysts wrote. “However, the historical evidence on inflation calls for caution.”