Goldman Sachs has lifted its inflation estimate for this year and next. And as a result, it has lifted its estimate for the number of Federal Reserve interest-rate hikes for 2023.
As for inflation, “we are increasingly concerned about two main risks,” Goldman economists led by Jan Hatzius wrote in a commentary.
“First, the initial inflation surge might have lasted long enough and reached a high enough peak to raise inflation expectations in a way that feeds back to wage and price setting.
“Second, a very tight labor market -- which now shows the widest gap between available jobs and workers in postwar U.S. history -- is generating broad-based wage growth at a pace well above that compatible with 2% inflation.”
Those two factors could combine to “ignite a moderate wage-price spiral,” the economists said.
They now forecast the personal consumption expenditures price deflator, excluding food and energy, will register a 3.7% annual increase at year-end, up from their previous forecast of 3.1%. Goldman predicts a 2.4% increase at year-end 2023, up from 2.2% previously.
The PCE deflator is the Fed’s favored inflation measure. The index jumped 5.2% in the 12 months through January, excluding food and energy.
Goldman predicted the consumer price index will register an annual increase of 4.6% at year-end in 2022 and 2.9% at year-end next year. The index soared 7.5% for the 12 months through January.
As for the Fed, “a very high inflation path in 2022 should make an easy case for steady rate hikes at all seven remaining [policy] meetings,” the Goldman economists said.
Given their inflation forecast, they now expect four Fed rate hikes next year, up from their prior forecast of three.
Meanwhile, market speculation of a 0.5-percentage-point hike by the Fed this month has disappeared. Interest-rate traders are pricing in a 94% probability that the central bank raises the federal funds rate target by 0.25 percentage point.
