Inflation may worsen sharply in summer and persist for ‘many years’

Goldman Sachs economists upgraded their inflation forecasts this weekend and warned clients that recent strong price spikes look similar to those that preceded record-breaking inflation decades ago, joining other experts who forecast that the inflation will last longer than previously expected.

Specifically, in a note to clients on Sunday night, Goldman economists said they expect consumer prices to rise faster later this summer as transportation and health insurance costs continue to rise, pushing up structural inflation, the which excludes volatile food and energy prices, from 6% in May to 6.3% in September.

Goldman expects the prices of cars and health insurance – two of the biggest drivers of inflation during the pandemic – to start falling “significantly” by the end of this year as Covid-era growth begins to fade. pushing core inflation to ease to 5.5% y-o-y and 2.4% in December 2023.

But economists also acknowledge that core inflation has strongly exceeded experts’ forecasts this year, rising steadily more than expected over the past six months.

They note that unexpected readings of inflation are starting to rival those seen in the 1960s and 1970s – when long-term price jumps above 10% (consistently higher than the last reading of 8.6% in May) contributed to prolonged periods weak economic growth and triggered a decade of low stock market returns.

In a note to clients over the weekend, LPL Financial chief economist Jeffrey Roach was more pessimistic, saying increased demand for travel-related goods was a “major concern” for inflation as prices for housing, restaurants and of accommodation are reaching new highs.

“Consumers may have to live in a world where inflation will run consistently higher than in the last decade,” Roach said, pointing to the concerns of central bankers such as the European Union’s Christine Lagarde, who warned last week that there are “increasing indications” – including the ongoing war in Ukraine – suggesting that “supply shocks to the economy are likely to persist for longer”.

“Policymakers will have to grapple with the real possibility that inflation rates will not fall back to their targets for many years,” Roach said, adding that a tight labor market is another uncertainty that could keep inflation above the Fed’s long-term 2% target.

Inflation ran rampant in the 1970s as multiple energy crises drove oil prices up to 400%, while central bankers prioritized efforts to improve the labor market – even if that meant risking further price increases . It took until 1979 when Paul Volcker took over as chairman of the Federal Reserve for the Fed to turn to fighting inflation, and although the efforts were ultimately successful, they also led to a recession in 1982.

To help ease inflation, President Joe Biden is expected to likely announce lower tariffs on some Chinese goods, including clothing and school supplies, possibly as soon as this week. But some experts worry that the move does nothing to address issues in the domestic supply chain that are driving up costs.

The decision “probably won’t move the inflation needle dramatically,” analyst Adam Crisafulli of Vital Knowledge Media said by email Monday, though he noted that “aggressive” sales set to begin this month at major retailers such as Walmart and Target could prove to be “much more important.”

This year’s rate hikes by the Fed to fight inflation have knocked stocks and fueled growing fears of a recession. Major stock indexes plunged into bear market territory last month, ahead of the central bank’s biggest rate hike in 28 years, and the gloom has prompted waves of layoffs at recently booming technology and real estate companies.

“We don’t think the Fed can stop the supply-side inflationary issues without absolutely destroying the economy, but at this point they seem to have surrendered to the fact that it has to be done,” says Brett Ewin, chief strategist purchase of First Franklin Financial Services.