BofA forecasts 5 years of inflation before an AI 'super deflation'

A new Bank of America report outlines a stark, two-phase macroeconomic forecast for the next decade, predicting five years of sustained inflation driven by a technology investment boom will give way to a period of “super deflation” starting around 2030.

"The global economy is approaching a technological 'singularity'—a non-linear inflection point where existing economic models and valuation frameworks will become comprehensively obsolete," Haim Israel, a strategist at Bank of America, said in the report.

The forecast is underpinned by an estimated $90 trillion in capital spending on AI, energy, and infrastructure, which is expected to keep inflation persistent in the near term. Markets are already reflecting this, with 5-year, 5-year forward inflation swaps holding steady around 2.45 percent and 10-year real yields elevated near 2.0 percent.

This outlook is reshaping investment strategy, prompting the bank to recommend that clients reduce exposure to long-duration assets like government bonds and increase holdings of credit. The framework suggests a major portfolio rotation is required to navigate the coming cycle, first hedging against inflation and then preparing for a deflationary productivity revolution.

A $90 Trillion Transition

The report argues that the immense capital required to build out the infrastructure for the artificial intelligence era is inherently inflationary. The bank identifies over $90 trillion in investment needed globally across data centers, renewable energy, grid infrastructure, and key commodities like copper and lithium. This spending, combined with what the report calls "hot-running" fiscal policy, is expected to support demand and maintain price pressures through the end of the decade.

This dynamic is creating a "wealth-reinvestment loop," according to the analysis. U.S. household wealth, which adds about $15 trillion annually on an $184 trillion base, is continuously recycled into consumption and these key investment areas. BofA projects this wealth base could grow to approximately $214 trillion by the end of 2027, providing sustained fuel for the economy.

The Deflationary 'Singularity' Arrives Post-2030

The second phase of the forecast begins when the productivity gains from AI start to overwhelm the initial inflationary pressures. The report posits that by the early 2030s, AI's ability to radically optimize processes will trigger one of the most profound deflationary cycles in history.

Bank of America highlights dramatic potential cost reductions across sectors. Drug discovery timelines could shrink from a decade to just 30 days, with costs falling from billions to millions of dollars. In materials science, millions of new materials could be discovered in weeks, fundamentally reshaping manufacturing, energy storage, and agriculture. This productivity shock is expected to drive down the costs of energy, healthcare, and goods.

Investment Strategy for a Two-Phase Decade

Given this forecast, Bank of America is maintaining a cautious stance on duration while remaining constructive on credit. The bank’s strategists advise clients to favor floating-rate credit products and equities over fixed-rate government bonds.

"Spreads have peaked, but yields have not," the report notes, highlighting that while high-yield credit spreads have tightened, long-term government bond yields have continued to climb to new highs for the year. For investors who must hold duration, the bank sees long-duration municipal bonds and investment-grade credit as more attractive than Treasuries, as their returns are less dependent on falling interest rates. The report specifically recommends assets like leveraged loans, AAA-rated CLOs, and preferred stocks.

This article is for informational purposes only and does not constitute investment advice.