If you think the new COVID-19 outbreaks will be the biggest threat to global economic growth…think again. According to a new Goldman Sachs analysis, the experts believe that inflation will eclipse new COVID-19 outbreaks.
The respected investment bank explained on November 8th that the Federal Reserve will almost certainly begin hiking interest rates as inflation in the United States continues.
They reported that higher-than-expected United States inflation has recently prompted them to pull forward their forecast for Fed liftoff by a full year to July 2022.
“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,” according to Goldman Sachs.
The reason that this will move at a gradual pace is a partial moderation in the prices of goods and in overall inflation. This will be driven by a combination of slower demand and a rising supply. They expect spending on goods to moderate on the demand side. This coincides with the U.S. government income support normalizing and will allow for service activity to rebound.
The United States’ real goods consumption is remaining at almost 10% above trend. And this already represents a fall of 5% since the peak in March. It was at this time that households received their stimulus checks. The adjustments necessary from that still have further to go.
Furthermore, since medical advancements will continue to slow the COVID-19 spread, Goldman Sachs expects a reduction in consumer fear of the virus. Therefore, rising price levels may replace COVID-19 as a primary bottleneck to economic recovery.
Goldman Sachs wrote: “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.”
They also expect a large section of the goods supply squeeze to slow down over the next year. Presently, the pressure on supply chains is great and inventories in areas like semiconductors, durable goods, and energy markets are extremely low. It is in an environment like this that any of the following might have a huge economic effect: a moderate production outage resulting from Covid outbreaks in China; an energy demand spike related to a cold winter; or other short-term disruptions.
The Department of Labor announced on Wednesday that year-over-year inflation for consumer prices reached 6.2% last month. This is the highest rate of increase in thirty years.
Laura Rosner-Warburton, a MacroPolicy Perspectives economist, told the Wall Street Journal, “I do think we’re moving into a new phase where inflation is broader and where things are going to get a little more intense.”
She also noted that part of this is connected to the fact that supply chain bottlenecks are not going to be resolved going into the holiday season. This will coincide with lots of purchases being made, the economy doing well, and strong demand.
Seema Shah, Principal Global Investors chief strategist, told CNBC, “Inflation is clearly getting worse before it gets better, while the significant rise in shelter prices is adding to concerning evidence of a broadening in inflation pressures.”
The Federal Reserve announced last week that it will begin tapering its monthly asset purchase. This marks the first reduction in aggressive monetary stimulus since the onset of COVID-19 and the lockdown-induced recession. They will not touch interest-rate targets, but the central bank will drastically cut bond purchases by $15 billion in November and December.