US inflation will be even worse this year than expected, after Federal ReserveMeasurement of primary inflation in the country has reached its highest level in 40 years, according to a new report by Goldman Sachs.
The Personal Consumer Price Index (PCE) rose 6.1 percent in January from a year earlier, the biggest annual increase since February 1982, according to federal data released Friday.
Goldman Sachs predicts that PCE inflation will remain high throughout the year before falling to 3.7% by the end of 2022, economists from the Wall Street giant wrote in a customer report on Sunday, which was seen by CNN Business.
The investment banking giant previously predicted that PCE inflation would fall to 3.1% by the end of the year, and its new forecast is almost twice the Federal Reserve’s 2% target, according to CNN Business.
“The picture of inflation has worsened this winter, as we expected, and how much it will improve later this year is questionable,” the bank’s customer report said.
Inflation in the United States will be even worse this year than expected, after reaching its highest level in 40 years, according to economists at Goldman Sachs. The Consumer Price Index (PCE) rose 6.1% in January from a year earlier
Goldman Sachs predicts in a new report that the price index for personal consumption will fall from 6.1% to 3.7% by the end of 2022. This is almost double the goal of the Federal Reserve PCE to cool to 2%
The PCE’s core price index is the preferred measure of inflation by the Federal Reserve for its flexible target of 2 percent and is an additional measure to the more widely known consumer price index, which reached a 40-year high of 7.5 percent last month.
Goldman Sachs economists predict that the CPI will fall to 4.6% by the end of the year and 2.9% by the end of next year, according to the bank’s customer report.
The two main inflation risks that Goldman Sachs said were “increasingly concerned” include inflation expectations and a very strong labor market.
“Initial inflation growth may have lasted long enough and peaked high enough to raise inflation expectations in a way that affects wage and price determinations,” the client’s report said.
Expectations of inflation could rise due to already “very high levels” if Russia’s attack on Ukraine leads to soaring energy prices or further disrupts the supply chain.
Goldman Sachs economists predict that CPI will fall to 4.6% by the end of the year and 2.9% by the end of next year, according to the bank’s customer report
American drivers see the effect of inflation first hand. The average national price of ordinary unleaded gasoline reached $ 3.61 on Monday, eight cents more than the average of $ 3,532 a week ago
The job market is also booming, and Goldman Sachs called it the biggest difference between available jobs and workers from the end of World War II.
Goldman Sachs said high inflation expectations and a booming job market “threaten to ignite a moderate spiral in wages and prices”, which means that rising wages will lead to higher prices and vice versa.
Along with its new inflation forecast, Goldman Sachs predicts that the Federal Reserve will have an “easy case” to raise interest rates and could do so up to seven times this year.
American drivers see the effect of inflation first hand. The average national price of unleaded gasoline reached $ 3.61 on Monday, eight cents more than the average of $ 3,532 a week ago.
In addition, it is 25 cents higher than the average of $ 3,356 a month ago and nearly 90 cents higher than the average of $ 2,717 a year ago, according to the AAA gas price index.
Californians are paying the highest prices, handing out an average of $ 4,827 per gallon of unleaded gas since Monday, up about eight cents from an average of $ 4,741 a week ago.
That’s 19 cents from an average of $ 4,637 a month ago and $ 1.14 from last year’s $ 3,681, the AAA said.
Fed President Jerome Powell is now facing difficult decisions on whether to continue raising interest rates to fight inflation as speculation grows that the United States may face a stagnant environment if the crisis in Europe slows economic growth. .
The so-called core PCE, which excludes volatile food and energy prices, rose 5.2 percent in January from a year earlier, the biggest increase since 1983.
PCE is an additional measure to the more widely known consumer price index (above), which reached a 40-year high of 7.5 percent last month
Fed Chairman Jerome Powell now faces tough decisions on whether to move forward with rising interest rates to fight inflation as Russia’s actions threaten global growth
The situation in Ukraine raises the prospect of further damaging inflation, sending the price of oil to rise worldwide.
Brent crude rose above $ 100 a barrel on Thursday for the first time since 2014. They retreated to about $ 98.7 a barrel early Friday.
For every $ 10 increase in the price of oil, a gallon of gasoline becomes about 20 cents more expensive.
Higher gas prices have a wide impact on prices, as more than 70 percent of retail goods are delivered by truck.
According to Moody’s Analytics, oil prices at $ 100 a barrel would reduce GDP growth by 0.1 percentage points in the second quarter and fall by 0.5 percentage points in the third quarter.
But there are now fears that the economy, hit by high oil prices, may not be in a bad position to withstand the tightening of monetary policy.
The last time inflation was so high, Reagan was recently in office and “High Inflation” was coming to an end.
The period of “Great Inflation” from 1965 to 1982 was marked by rising inflation, which exceeded 14 percent by 1980.
January’s inflation reporting put annual inflation at its highest level since February 1982, as the period known as “High Inflation” was approaching.
Driven by failed monetary policy and two oil crises in 1973 and 1979, the period from 1965 to 1982 was marked by rising inflation, which exceeded 14 percent by 1980.
Consumers have been hit hard by rising prices, and outrage over the inflation crisis has contributed to Ronald Reagan’s defeat against incumbent President Jimmy Carter in 1980.
“Inflation is violent like a thief, frightening like an armed robber and deadly like a murderer,” Reagan said, devoting the first years of his presidency to tackling the problem.
Reagan’s conflicting economic policies had four key pillars: cutting government spending, cutting taxes, cutting regulations, and tightening money supply through higher interest rates.
skeptics claims at the time that Reagan’s policies would lead to even higher prices, but history proved them wrong and inflation soon returned to steady levels.
Woman shopping at Pioneer Grocery Store, New York, USA, March 1983
“The implications of the evolving situation in Ukraine for the US medium-term economic outlook will also be a consideration in determining the appropriate rate of interest rate hike,” Cleveland Fed President Loretta Mester said Thursday.
The risks may be as obvious as high oil prices, which weigh on consumer spending and raise inflation even more, or as unknown as how Russia can respond to US sanctions.
If Russia, the world’s second-largest oil exporter, starts withholding oil from world markets in response to sanctions, the shockwaves could be huge.
Richmond Fed President Thomas Barkin said arguments for raising US interest rates remained “stable”, but also called the invasion a “disturbing” event that would force politicians to consider what might happen.
“The main demand is strong. The labor market is tight. Inflation is high and expanding, “Barkin said, describing a key case of rising interest rates.
“But I will say that it is disturbing to hear the news. As always, you need to start and think about where this thing might go that you may not have anticipated in the first place.
The events in Ukraine have contributed to the central bank’s unexpected new momentum, echoing the turmoil in oil prices in the 1970s, which was also triggered by geopolitical conflict, and has led to stagflation, a combination of low growth and high inflation.
In this case, it was war and other tensions in the Middle East, and it came at a time when the US economy was much more dependent on energy imports and US industry was far less energy efficient.
However, Fed officials were beginning to consider the consequences of an event that had the potential to both slow growth and increase inflation.
“We will be watching this closely here in Atlanta and in the Federal Reserve system to assess the economic and financial impacts,” Atlanta Fed President Rafael Bostic said during a virtual event.
However, he said the Fed’s first issue now was controlling inflation and that he was ready to raise interest rates by up to four-quarters this year, “and depending on how things go, it could be more than that.” .
The Fed has two central mandates: keeping inflation at 2 percent a year and achieving “maximum employment.”
The two mandates often contradict each other because the Fed is trying to keep inflation under control by raising interest rates and trying to boost employment by lowering interest rates and pumping money into the economy by buying bonds.
The Fed sees controlled inflation as good because it encourages spending and business investment instead of hoarding money.
But uncontrolled inflation can be dangerous, undermining consumers’ purchasing power and hitting low-income families and older retirees hardest.
The US Federal Reserve cut its base overnight interest rate to nearly zero last year and flooded the economy with money through monthly bond purchases, which it is now cutting.