Goldman Sachs: Markets Too Optimistic About Inflation Cooling

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Goldman Sachs’ strategists have cautioned that markets seem to be more optimistic than they are about the pace of inflation’s decline. “Although we expect further declines in inflation going forward, markets appear considerably more optimistic than we are about the pace of cooling,” they explained.

Goldman Sachs Expects U.S. Inflation to Decline Slower Than Market Anticipates

Goldman Sachs’ strategists, led by chief interest rates strategist Praveen Korapaty, warned in a note Friday that inflation in the U.S. is projected to decrease at a slower pace than what is currently being priced by the markets, Bloomberg reported.

The Goldman strategists explained that investors may be assuming that a sharp slowdown in economic growth would result in a more rapid decline in inflation. Moreover, they could also be more bearish about energy prices compared to what is implied by commodity futures. However, the strategists argued that these factors will have a limited impact on inflation, emphasizing that markets are additionally ignoring the potential for “delayed-onset inflation” in sectors like healthcare. They wrote:

Although we expect further declines in inflation going forward, markets appear considerably more optimistic than we are about the pace of cooling.

The Federal Reserve paused raising interest rates after 10 consecutive rate hikes at their Federal Open Market Committee (FOMC) meeting last week. Their decision followed the U.S. Bureau of Labor Statistics (BLS) reporting that inflation had cooled from 4.9% to 4% in May — the smallest 12-month increase since March 2021. However, core inflation remains elevated at 5.3%.

While many people expect the Federal Reserve to start cutting interest rates soon, Fed Chair Jerome Powell said at a press conference Wednesday that while “it will be appropriate to cut rates at a time when inflation is coming down really significantly, we’re talking about a couple years out.”

Do you agree with Goldman Sachs about inflation in the U.S.? Let us know in the comments section below.