Goldman Sachs analysis says that inflation will eclipse new COVID-19 outbreaks as the primary threat to global economic growth. Sachs explained this week that the Federal Reserve will likely begin hiking interest rates as inflation in the United States continues:
Higher-than-expected US inflation recently prompted us to pull forward our 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.
The key to this gradual pace is a partial moderation in goods prices and in overall inflation, driven by a combination of slowing demand and rising supply. On the demand side, we expect spending on goods to moderate as US government income support normalizes and service activity rebounds. Although US real goods consumption remains nearly 10% above trend, this already represents a decline of 5% since the peak in March when households received stimulus checks, and the adjustment likely has further to go.
Since medical advancements will continue to slow COVID-19 spread, Goldman Sachs expects a reduction in consumer fear over the virus. Rising price levels may therefore replace COVID-19 as a primary bottleneck to economic recovery:
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. Although we expect a significant part of the goods supply squeeze to abate over the next year, at present the stress on supply chains is substantial and inventories in semiconductors, durable goods, and energy markets are very low. In such an environment, even a moderate production outage resulting from covid outbreaks in China, an energy demand spike related to a cold winter, or other short-term disruptions could have sizable economic effects.
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