‘Alarming’ Inflation Data Indicates Prices Could Keep Surging For Months, Goldman Sachs Warns

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Topline

An unexpected and sustained surge in consumer prices has started to impact a wider array of goods and services than has been typical in past inflationary periods—a sign that rising prices will likely linger for months to come, Goldman Sachs warned Tuesday.

The unexpected surge in consumer prices “looks more concerning” now because it’s affecting more … [+] goods and services than has been typical in the past.

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Key Facts

In a Tuesday evening note to clients, Goldman’s chief economist Jan Hatzius said recent inflation “looks more concerning” now because of the extent to which prices have risen and the growing breadth of core inflation, which excludes volatile food and energy prices to better gauge a consumer’s long-term purchasing power.

Two-thirds of items encompassing the core consumer price index, which tracks the prices of everything from apparel and cars to rent and medical care, have seen 4% annualized inflation since last July, compared to only 19% of the basket in 2019, while 16% of items have seen prices rise at least 10%—much more than the 1% of items seeing that level of inflation during similar periods historically.

In an “arguably more alarming” development, the large price increases have been increasingly broad-based, expanding beyond those “driven overwhelmingly by extreme moves in a few supply-constrained categories,” as was the case for much of the past year for products like cars and meat, the economist said.

With about 50% of categories reporting inflation above 4% in the latest CPI report, Goldman says the breadth indicates core inflation, which is already at the highest level in nearly 40 years, could rise another 0.5 percentage points over the next six months—before taking into account additional upward pressure from wage increases or lingering supply chain constraints.

Beyond that, the “implications are less clear-cut,” Hatzius said, pointing out rising inflation in the late 1970s coincided with long-lasting runaway inflation, while shorter-lived bouts in 2000 and 2006 did not.

One near certainty is that the Federal Reserve is expected to combat rising prices by hiking interest rates as soon as next month, a policy move that successfully curbed inflation in 2000 and 2006, but Hatzius notes there were also repercussions:Inflation was curbed in each period, but the higher rates also resulted in a tech stock crash and a housing price crunch.

Key Background

Trillions of dollars in unprecedented government spending helped keep the economy afloat during the pandemic, but levels of historically high inflation have rattled the market in recent months—and even more so in the new year. After rising 27% in 2021, the benchmark S&P 500 index is down nearly 11% so far in 2022. Bank of America and Morgan Stanley are among the Wall Street investment banks that have warned inflation—and not the pandemic nor the conflict between Russia and Ukraine—is now the biggest risk to the market. Last month, the International Monetary Fund downgraded its U.S. economic growth projections from 5.2% to 4%, citing, among other things, the Fed’s removal of pandemic-era stimulus as a risk to the economy.

Tangent

Consumer prices rose 7.5% in the 12 months ending in January, marking the largest annual increase since February 1982, according to the Labor Department.

What To Watch For

The central bank’s next two-day policy meeting concludes on March 17, when officials are expected to announce if—and by how much—they’ll raise interest rates. Goldman Sachs economists project the Fed will announce seven consecutive 25-basis-point hikes at each of the remaining monetary policy meetings this year—more than double the three hikes many officials have forecast.