A new analysis from Goldman Sachs warns that the economic damage from inflation will dwarf that of new COVID-19 outbreaks.
“Higher-than-expected US inflation recently prompted us to pull forward our forecast for Fed liftoff by a full year to July 2022,” Goldman Sachs stated. “We now expect core PCE inflation to remain above 3% — and core CPI inflation above 4% — when the QE taper concludes, which would make a seamless move from tapering to rate hikes the path of least resistance. After liftoff, we see a second hike in November 2022 and two hikes per year after that.”
“The key to this gradual pace is a partial moderation in goods prices and in overall inflation, driven by a combination of slowing demand and rising suppl,” Goldman Sachs continued. “On the demand side, we expect spending on goods to moderate as US government income support normalizes and service activity rebounds. Although US real goods consumption remains nearly 10% above trend, this already represents a decline of 5% since the peak in March when households received stimulus checks, and the adjustment likely has further to go.”
Goldman Sachs explained that the biggest threat to the economy will now be rising prices.
“This means that the biggest risk to the global economy may no longer be a renewed downturn because of fresh virus outbreaks, but may now be higher inflation because of tight goods supplies and excessive wage pressure,” Goldman Sachs said. “Although we expect a significant part of the goods supply squeeze to abate over the next year, at present the stress on supply chains is substantial and inventories in semiconductors, durable goods, and energy markets are very low. In such an environment, even a moderate production outage resulting from covid outbreaks in China, an energy demand spike related to a cold winter, or other short-term disruptions could have sizable economic effects.”
The analysis comes after the Department of Labor released data showing that inflation had hit its highest level in more than 30 years.
According to Treasury Secretary Janet Yellen, inflation is expected to continue through next year.
“On a twelve-month basis, the inflation rate will remain high into next year because of what’s already happened. But I expect improvement by the end of — by the middle to end of next year, second half of next year,” Yellen said. “We are going through a period of inflation that’s higher than Americans have seen in a long time.”
