Goldman: Inflation Will Get Worse Before It Gets Better

It has not been a good year for Goldman’s economists in their dismal attempts to predict what transitory persistent inflation will do as the year progressed. As the following summary sheet notes, what started off in April as a forecast for 2.77% year-end inflation has singe ballooned into the realization that Headline CPI will be 6.31%. And judging by the 45bps monthly increase in inflation estimates this number will only get higher.

Amusingly, one month ago when it became pretty clear in which direction Goldman’s premeditated “error” is headed and at what pace we wrote “at the rate, Goldman is constantly wrong to the tune of 0.45% every single month, and so by December core PCE should be about 5.5% and the US will have collapsed into the stagflationary abyss.” We still hold to this prediction. 

And sure enough, while overnight Goldman’s economics team tried to salvage some of its credibility, publishing a note from economists Spencer Hill and David Mericle titled “2022 Inflation Outlook: Getting Worse Before It Gets Better” in which they write that inflation “will eventually revert closer to the Fed’s 2% goal”, they too were forced to admit that “prolonged supply-demand imbalances, strong wage growth, and accelerating rents will leave core PCE inflation and especially core CPI quite high for much of 2022.

No wonder mainstream propaganda is now going full-bore with such garbage as “Why the inflation we’re seeing now is a good thing“. We can only hope that most people can see right through this steaming pile of dogshit.

Anyway, going back to Goldman, the bank now expects core PCE inflation, after hitting a 30 year high driven mainly by purchases of durable goods..

… to rise further from 3.6% at present to 4.4% at end-2021, but to then decline to 2.3% at end-2022 and 2.1% at end-2023 (and when this benign forecast is wrong too, Goldman will just keep hiking its near-term forecasts, while cutting its longer-term inflation outlook, just because). The bank also discussed its expectations for each of the three key drivers of inflation in the current backdrop below:

  • Supply-demand imbalance. The vampy squid expects demand to moderate slightly next year as services spending rebounds and peak fiscal and stay-at-home boosts fade. On the supply side, the bank expects fading headwinds from input shortages (such as semis), labor shortages, and shipping delays to support rebuilding of inventory which should in turn restore competition and bring down elevated prices (for more see “When Will The Supply-Chain Collapse Finally Stabilize: Here Is Goldman’s Take“). Then, as inventory is rebuilt, the goods sector should in theory transition from an unusual environment of scarcity back to an environment of abundance in which competition will bring down elevated prices. Goldman expects this process to start by the second half of next year and to extend into 2023.

  • Wage growth. The bank also expect wage growth to slow to just over 4% as labor supply returns, which is stronger than last cycle but after netting out productivity growth, consistent with the Fed’s inflation goal.

  • Shelter inflation. This one is troubling: Goldman’s shelter inflation model projects that the further labor market recovery combined with spillover effects from the ongoing boom in house prices will push shelter above 4½% to the highest rate in three decades by end-2022. Farther out in 2023, we expect shelter to moderate to about 4%, still somewhat higher than last cycle (see “Goldman Warns Of “Substantial” Surge In Home Prices, Expects Bigger Housing Bubble Than 2007“).

The bottom line according to Goldman: “prolonged supply-demand imbalances, strong wage growth, and accelerating rents will leave core PCE and especially core CPI quite high for much of next year.” But then, “as supply-constrained categories shift from a transitory inflationary boost to a transitory deflationary drag, we expect core PCE inflation to fall from4.4% at end-2021 to 2.3% at end-2022 and 2.1% at end-2023.”

The bank also warns that “the full set of inflation data will look quite hot on a year-on-year basis around the middle of next year when tapering ends. Core PCE inflation is likely to remain above 3%, core CPI inflation above 4%, and trimmed measures should rise as the shelter category accelerates. This hotter inflation dashboard through the end of the taper process is the main reason that we expect a seamless transition from tapering to rate hikes

As an interesting aside for the CPI vs PCE purists, Goldman notes that “CPI inflation is likely to exceed PCE by more than usual next year, especially in the first half, for three main reasons. First, durable goods have a higher weight in the CPI. Second, shelter inflation also has a much larger weight in the CPI. Third, while the end of pandemic-related support payments is likely to lower government-paid prices included in the PCE health care index, the insurance component that is unique to the CPI health care index is likely to spike over the next year.”


In conclusion, all we can say is that this is the same bank that predicted six months ago that the “transitory” inflation scare would blow over by year-end 2021. Not only did that not happen but Goldman was forced to admit what we said back in April – that this inflation is not transitory but quite persistent and will remain so for a long time, so if anyone is skeptical that any of this will take place as predicted, we certainly understand.

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