Goldman Sachs’ strategists, led by Praveen Korapaty, the chief interest rates strategist, have warned about the pace of inflation decline in the United States. According to Bloomberg, strategists believe the market underestimates how slowly inflation will decrease.
In their note, the Goldman strategists pointed out that investors might be assuming that a sharp slowdown in economic growth would lead to a rapid decline in inflation. Additionally, they suggested that there could be a more pessimistic outlook on energy prices compared to what is indicated by commodity futures. However, the strategists argued that these factors would only have a limited impact on inflation. They also highlighted the markets’ oversight of the potential for “delayed-onset inflation” in sectors such as healthcare.
The Federal Reserve recently decided to pause raising interest rates after implementing ten consecutive rate hikes. This decision came after the U.S. Bureau of Labor Statistics reported a decrease in inflation from 4.9% to 4% in May, marking the smallest 12-month increase since March 2021. However, core inflation remains high at 5.3%.
While many expect the Federal Reserve to begin cutting interest rates soon, Fed Chair Jerome Powell expressed a different stance during a press conference. Powell stated that rate cuts would only be appropriate when inflation significantly decreases, which he believes would take a few years.
Goldman Sachs’ cautionary note highlights the disparity between market optimism and the strategists’ more conservative outlook on inflation. As the markets continue to overlook certain factors and potential delayed-onset inflation, it is important to closely monitor the pace of cooling and its impact on future economic decisions.
