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