“The inflation picture has worsened this winter as we expected, and how much it will improve later this year is now in question,” Goldman Sachs economists wrote in a client report Sunday night.
Given that uncertainty, Goldman Sachs is raising its inflation outlook. It expects that core PCE inflation, the Federal Reserve’s preferred price metric, will decelerate to 3.7% at the end of this year.
That’s a jump from Goldman’s previous forecast of 3.1% — and almost double the Fed’s goal of 2%.
Goldman also now expects consumer prices, which rose by a near-40-year high of 7.5% on an annualized basis in January, to cool off to 4.6% by the end of this year and 2.9% by the end of next year.
The Wall Street bank said it is “increasingly concerned” about two main inflation risks: inflation expectations and the very strong jobs market.
“The initial inflation surge might have lasted long enough and reached a high enough peak to raise inflation expectations in a way that feeds back to wage and price setting,” the report said. And inflation expectations could rise further from already “very high levels,” Goldman added, if the Russian invasion of Ukraine causes energy prices to spike or disrupts supply chains.
Economists closely watch inflation expectations because if businesses and consumers anticipate prices will keep rising, they will change their behavior and make it a self-fulfilling prophecy.
At the same time, the jobs market is booming, with Goldman Sachs noting the widest gap between available jobs and workers in postwar US history.
The one-two punch of high inflation expectations and a strong jobs market “threaten to ignite a moderate wage-price spiral,” Goldman Sachs said, somewhat reversing its previous assessment that there is little risk of such a spiral.
Given the new inflation forecast, Goldman Sachs said there should be an “easy case” for steady rate hikes at all seven remaining Fed meetings this year. The bank also penciled in an additional rate increase for next year, bringing the 2023 total to four.