Goldman Sachs economists raised their inflation projections this weekend. They warned clients that recent price spikes are similar to those that occurred decades ago.
Goldman economists sent a note to clients on Sunday night. They said they expected consumer prices to rise faster this summer because transportation and insurance costs continue rising. This will push core inflation (excluding volatile food prices) from 6% in May to 6.3% in September.
Goldman predicts that health insurance and automobile prices, the two largest contributors of inflation to the pandemic, will start “outright” dropping by the end of this year. This is because Covid-era growth slows down, and core inflation falls to 5.5% at year’s end and 2.4% in December 2023.
The economists acknowledge that core inflation has significantly outperformed expert forecasts this year, rising consistently more than expected in the past six months.
They also note that the surprise readings are starting to match those of the 1960s and 1970s when long-lasting price rises of more than 10% (solidly greater than the most recent readings of 8.6% in May) contributed to periods of slow economic growth and sparked a decade with low stock-market returns.
In a weekend note, Jeffrey Roach, LPL Financial’s chief economist, expressed more concern about inflation to clients. He stated that the rise in travel-related demand is a significant concern as prices for accommodation, restaurants, and housing continue to climb.
Roach stated that consumers might be forced to live in a world where inflation is consistently higher than in the past decade. Roach cited concerns expressed by central bankers such as Christine Lagarde of the European Union, who warned last week that there were “growing signs” that “supply shocks could continue to impact the economy for longer.”
Roach says policymakers must face the reality that inflation rates may not fall to their preferred targets over many years. He also mentions that the tight labor markets could create uncertainty that could keep inflation at the Fed’s 2% target.
Inflation was rampant during the 1970s when multiple energy crises drove oil prices up to 400%. Central bankers emphasize improving the labor market, even if that means further price rises. Paul Volcker was elected as the Federal Reserve Chairman in 1979. The Fed voted to combat inflation. However, the efforts were unsuccessful and led to a recession in 1982.
President Joe Biden may announce lower tariffs for certain Chinese goods as early as this week to reduce inflation. Some experts are concerned that the move will not address domestic supply chain problems driving up prices. Analyst Adam Crisafulli from Vital Knowledge Media stated that the decision “probably won’t move the needle significantly on inflation.” However, he said in an email that aggressive discounts starting this month at major retailers such as Walmart and Target could prove “far more important.”
Stocks have been impacted by the Fed’s interest rate increases this year to combat inflation. The central bank’s most significant interest rate hike in its 28-year history pushed major stock indexes into bear markets last month. This prompted waves of layoffs at booming technology as well as realty companies. Brett Ewing, Chief Market Strategist at First Franklin Financial Services, says that while we don’t believe that the Fed can end the inflation issues on the supply side, they seem to be resigned that it must.