Prices skyrocket. Goldman Sachs says prices will go even higher

“Unfortunately, it will take longer than expected to find out the imbalances between supply and demand at the heart of inflation,” Goldman Sachs clients warned on Sunday night.

“The inflation overrun will probably get worse before it gets better,” the bank’s economists wrote in a research report.

Like much of Wall Street and the Federal Reserve, Goldman Sachs had expected high prices to return to earth quickly. It is now a recognition that inflation will last longer as supply struggles to keep pace with increasing demand.

Due to “long-standing” imbalances between supply and demand, soaring wages and rising rents in the midst of the housing boom, inflation measurements will remain “quite high for much of next year,”[ads1]; Goldman Sachs admitted.

This is bad news for Americans who are struggling with the high cost of living, as well as businesses that are under pressure from shortages and rising prices. Low-income families and those living on a fixed budget are most affected by rising prices for necessities such as gas, food and clothing.

The inflation forecast is also a setback for the White House because high prices and supply chain problems are hurting Americans’ views of the US economy – which had been expected to be a strong side for President Joe Biden this year.

Instead, nearly two-thirds of Americans described the economy as poor in a poll published last week. Almost half expect the economy to deteriorate next year.

30 years high for inflation

Annual inflation climbed at the fastest pace in more than 30 years during September, according to the Ministry of Trade. It is based on the 4.4% increase in the price index for personal consumption expenditure. Excluding food and energy, core PCE, the Fed’s preferred inflation measure, rose 3.6% in August and September, the fastest pace since May 1991.

The Fed has now changed its tune on inflation, and acknowledges that high prices will not disappear immediately.

Americans are becoming pessimistic about the economy as high inflation persists

“We see shortages and bottlenecks persist into next year, well into next year,” Fed Chairman Jerome Powell told reporters at a news conference last week. “We still see higher inflation.”

Everyday Americans seem to agree.

Consumers now expect prices to rise by 5.7% over the next year, according to a survey released Monday by the NY Federal Reserve. This is the highest level since the survey started in June 2013 and the 12th monthly increase in a row.

The Fed is closely following these surveys because expectations of high inflation may change consumer and business behavior, and create a self-fulfilling prophecy.

The good news is that Goldman Sachs says its core view remains that supply-demand imbalances “will largely resolve, leaving inflation close to the Fed’s target.” This is in line with what Powell has said in recent weeks.

“We do not believe that aggregate demand is on an unsustainable path or that inflation expectations have become unfounded, and the overrun should therefore ultimately prove to be temporary,” Goldman Sachs economists wrote in the report.

In other words, the Fed is unlikely to need to slow down the economy to fight inflation through sharp rate hikes.

The risk tilted towards more, not less, inflation

Nevertheless, Goldman Sachs expects core PCE inflation to rise from the current 30-year high of 3.6% to 4.4% by the end of 2021. The Fed’s preferred inflation measurement is expected to cool to 2.3% by the end of 2022. and 2.1% by the end of 2023.

Similarly, core consumer prices are expected to remain in the mid-5% range “large parts of the winter”, before falling to 4% next summer and 3.2% by the end of 2022, Goldman Sachs said.

It is well above the Fed’s 2% target and can keep the fear of the economy high.

As Powell said during his press conference, there is still great uncertainty about the inflation outlook. No one can say for sure when prices will return to normal.

“The risks to our forecast are likely to be lifted,” Goldman Sachs acknowledged.

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