Goldman raises inflation outlook, sees 11 rate hikes through 2023

Published Mon, Feb 28 202212:23 PM ESTUpdated Mon, Feb 28 20225:21 PM EST

Goldman Sachs has raised its expectations for both inflation and interest rate increases through the end of next year, saying it is "increasingly concerned" about the pace of inflation. The firm says it now sees core inflation running at a 3.7% pace through the end of 2022, a considerable upgrade from the previous forecast of 3.1%. That estimate is for the personal consumption expenditures price index, the Federal Reserve's preferred yardstick. Core PCE excludes food and energy prices, which can be volatile. "A very high inflation path in 2022 should make an easy case for steady rate hikes at all seven remaining" Federal Open Market Committee meetings in 2022, Goldman economist David Mericle said in a note to clients. The FOMC sets interest rates for the Fed. Consequently, the firm has boosted its expectations for rate increases in 2023 to four, one more than previously forecast. That would bring to 11 the total rate hikes through the end of next year and raises Goldman's outlook for the terminal fed funds rate now anchored in a range of 0%-0.25%, to move ultimately to 2.75%-3% in the years ahead. The accelerated rate outlook comes even though Goldman sees core PCE inflation receding to 2.4% by the end of 2023, though that's higher than the previous 2.2% forecast. Central to the forecast is a growing worry that price increases once thought to be linked almost completely to pandemic-related factors — and thus likely to ease — are broadening. Mericle said the persistence may be raising longer-term inflation expectations, while a labor market that has gotten extremely tight is generating persistently higher wages, "well above that compatible with 2% inflation" that the Fed targets. "Together, these forces threaten to ignite a moderate wage-price spiral," he wrote. January's core PCE reading showed a 12-month increase of 5.2%, the highest since 1983. The headline level rose to 6.1%, the highest since February 1982. The consumer price index, a more widely followed inflation gauge, probably will rise 4.6% in 2022 and 2.9% through 2023, according to Goldman. Headline CPI rose 7.5% year over year in January. Inflation expectations among consumers and businesses are on the rise. Consumers see inflation growing at a 5.8% pace over the next year, according to the New York Fed , while business expectations are at 3.6% — the highest point ever in Atlanta Fed data that goes back to October 2011. The Atlanta Fed also measures "sticky" inflation , for goods and services that don't change often, against "flexible" inflation, or prices that tend to move frequently. Sticky inflation — which covers a lot of service-based costs in health care and education, as well as housing — rose 4.2% in January, the highest 12-month increase since December 1991. Flexible costs — food, energy and hotels — zoomed up 17.8% for the month, just 0.1 percentage point below a December record for data that goes back to January 1967. The Russia invasion of Ukraine, moreover, could cause energy prices to spike even higher and for supply chains to be hampered even further, Mericle said. The trend of rising underlying price pressures calls "for a reassessment of the inflation outlook," he said. Rising wages add to the concerns, with the Atlanta Fed's wage growth tracker showing a gain of 5.1% in January, the highest since August 2001. "Anecdotal evidence of businesses becoming accustomed to raising prices more frequently and aggressively, reviewing wage levels more often, and exploring measures such as shortening contract horizons and inserting price escalator clauses into contracts, adds to the concern," Mericle wrote. Fed officials at their March 15-16 meeting are likely to enact their first interest rate increase in more than three years to thwart inflation. There had been expectations that the central bank may try a more aggressive 0.5 percentage point hike for the first move, but market pricing has shifted down to a 0.25 percentage point hike as being far more likely. In a talk Monday with Harvard University students, Atlanta Fed President Raphael Bostic, who had ignited anticipation of a 50-basis-point hike a few weeks ago, said he's now expecting the smaller move. "Today as we speak, I'm still in favor of a 25-basis-point move at the March meeting," Bostic said, adding that he will continue to watch the data for the monthly pace of inflation increases before a possible reassessment.

Gasoline fuel prices above five dollars a gallon are displayed at a Shell gas station in the Chinatown neighborhood of Los Angeles, California, on February 17, 2022.

Patrick T. Fallon | AFP | Getty Images

Goldman Sachs has raised its expectations for both inflation and interest rate increases through the end of next year, saying it is "increasingly concerned" about the pace of inflation.