Democrats' Build Back Better plan could boost inflation, BofA says. It's exactly what Joe Manchin is worried about.

• The Build Back Better plan does pose an inflation risk, Bank of America Research economists said.
• Even if BBB leaves inflation high a little while longer, its investments are still worth making, BofA said.

Sen. Joe Manchin has a lot of reasons for opposing Biden's Build Back Better agenda. Inflation is a big one.

He's right to be concerned, but only so far, Bank of America Research says.

As Democrats push forward with plans to pass the social spending package before Christmas, the West Virginia senator remains the party's biggest hurdle. Manchin's vote is crucial to passing BBB, yet he has repeatedly raised concern around the $1.75 trillion bill driving inflation even higher. Democrats have argued the plan is fully paid for, and that its spending is spread out over 10 years. Yet Manchin continues to waver on whether the package should be approved while inflation runs at the fastest pace since 1982.

New research from BofA suggests Manchin's concerns aren't unfounded. Analysis of the package shows it adding roughly $260 billion to the government deficit over the next 10 years. Yet the plan's spending is "front-loaded" and revenue from new taxes is "back-loaded," economist Aditya Bhave said in a Friday note to clients. As such, the plan's approval could quickly flood the US with new spending and keep price growth at worrying highs before the revenue from increased taxes on the wealthy and corporations begins flowing.

"We see it as a major near-term fiscal expansion," he said, adding the legislation will "create upside risks to inflation."

The package's pros outweigh its cons, even if it keeps prices soaring a little while longer, according to BofA. The risk of higher inflation "does not mean the investments are not worth making," Bhave said, adding elements like universal pre-school can be "very beneficial for the economy" in the long run.

BofA expects the spending plan to eventually pass in 2022, but only after some significant changes. The price tag will drop to $1.5 billion after trimming increases to Medicare and Medicaid spending, as well as offering a smaller increase to the SALT cap, the researchers predict. The tweaks will pull the package's deficit impact as low as $100 billion after accounting for enhanced IRS tax enforcement, the bank said.

Still, investments made in the bill "stimulate demand more than supply" and risk lifting inflation, Bhave said. The bank sees price growth peaking in the fourth quarter of 2021, and while inflation is expected to cool in 2022, rates will hover between 2.5% and 4% through the year. That's well above the 2% average the Fed plans to hold inflation at over the long term.

It also represents the biggest worry Manchin has toward BBB. The senator said earlier in December that the "unknown we're facing" on whether inflation cools off "is much greater" than the need to quickly pass the bill. Data out on Friday confirmed Manchin's fears, with a government report showing inflation accelerating again in November. Though Manchin kept the door open to passing BBB after a Monday talk with President Joe Biden, he's yet to join the rest of his party in supporting the plan.

The plan's passage would also give the recovery a small boost next year. Funding in BBB could offset the winding down of Democrats' March stimulus, Bhave said. The bank sees the plan helping drive 4% GDP growth in the first half of 2022 and 2.5% growth in the second half.