U.S. inflation is about to rise—Is it a pit dug by the U.S. stock market itself?

Bank of America Merrill Lynch warns that while stock prices rise, it may exacerbate inflationary pressures.

On July 11th, according to news from the Wind Trading Desk, Bank of America Merrill Lynch revealed a market-overlooked inflation driver in its latest research report: the rise in stock prices itself is pushing up PCE inflation.

Aside from tariff factors, the stock market rebound is expected to contribute at least 6 basis points to core PCE inflation in June through the portfolio management fee mechanism. Analysts at the bank expect that the core PCE inflation rate will peak at 3.2% in November.

Bank of America Merrill Lynch stated that this indicates investors are facing a complex investment environment: while the stock market rise provides returns, it also raises inflation expectations, potentially limiting future monetary policy space and creating a potential policy dilemma.

How Stock Price Increases Push Up Inflation

Bank of America Merrill Lynch's research shows that while tariff-related price increases are a major driving factor, the stock price rebound constitutes another important inflation driver.

The report states that stock prices and broader financial asset prices influence PCE inflation through the portfolio management subcategory. Since management fees are a function of fund value, the rise in the stock market directly pushes up the price index of this category.

Bank of America Merrill Lynch noted that as the stock market rebounds, this factor, which previously dragged on core inflation, will turn into an inflation driver.

In April and May, the portfolio management category dragged on core inflation, but the recent rebound in stock prices means this drag will turn into an inflation driver in the coming months.

Data provided by Bank of America Merrill Lynch shows a significant correlation between stock price changes and PCE portfolio management inflation, with a correlation coefficient R² reaching 0.245.

Analysts at the bank quantified the impact of this "swing factor":

• The weight of portfolio management in core inflation is about 1.7%;

• In April, this category caused an 11 basis point drag on core inflation;

• The drag narrowed to 1 basis point in May;

• It is expected that in June, this category will contribute at least 6 basis points to core PCE.

The report states that this means the overall swing reaches 7 basis points, making it difficult for core PCE to maintain low levels