Goldman Sachs analysts highlighted key points that could contribute to lower inflation in the US by 2023.
Multinational investment bank Goldman Sachs (NYSE: GS) is expecting to see a “significant” drop in US inflation come 2023. After a year of economic hardship, losses, and historic declines, Goldman Sachs said US inflation will ease in 2023. The investment banking company tied the incoming inflation softening to lower supply chain constraints, lower wage growth, and a peak in shelter inflation.
According to Goldman Sachs economists, led by Jan Hatzius, the company is expecting the core PCE to drop from the current 5.1% to 2.9% by December 2023. The economists added that stronger USD and weaker commodity prices would all impact inflation. During the weekend, a member of the Board of Governors of the Federal Reserve System, Christian J. Waller, warned that the central bank could reduce the pace at which the rate is increasing at its next meeting. However, he added that this action does not equal “softening” in its aim at lower inflation.
Data compiled last week revealed that US inflation lessened more than expected in October. The record showed that inflation grew at 7.7% last month, its slowest pace since the beginning of the year. In reaction to the lower growth rate, John Briggs of Natwest said:
“It certainly shows how much the markets been keyed about, worried about, and wants to run on CPI if you get any sort of help here. It just brings up the idea of peak inflation, peak Fed… The Fed will slow and peak rather than continue to aggressively hike at 75 basis points as at a time.”
Specifically, the Goldman Sachs analysts highlighted key points that could contribute to lower inflation in the US by 2023. The economist mentioned that the effect of supply-constrained goods may reduce. They predicted a fall from the current +0.7 percentage point to -0.4 percentage point by the end of next year. If this happens, it will account for almost 50% of the shed in overall core inflation.
Another possible major contributor to lower inflation in the coming year, according to Goldman Sachs, is the rebounding inventories of cars and consumer goods. The shipments of automotive microchips have also gained 42% above 2019 figures. Also, there is an expected peak in YoY shelter inflation, which is another reason to expect lower core inflation. There are currently a million apartments under construction or permitted, which is causing a rebound in rental vacancies. According to Goldman, vacancies will likely rebound to pre-pandemic rates in 2023.
Furthermore, the analysts said slower wage growth could reduce upward pressure on service inflation in the coming year. They predict that YoY wage growth will drop 1.5pp to 4% next year, which will cause lower inflation in labor-intensive services categories. The analysts wrote:
“All in, we forecast core PCE inflation to fall significantly.”
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