Strategists at Goldman Sachs Group Inc have warned that inflation in the US will not come down as quickly as the markets are presently anticipating. Investors may be assuming that a sharp deceleration in growth will lead to a more rapid easing of price pressures, and could also be more bearish on energy prices than is implied by commodities futures. Goldman’s strategists see limited ability to lower prices in these areas, and note that markets are ignoring the potential for “delayed-onset inflation” in sectors such as healthcare. The Federal Open Market Committee paused its series of interest-rate hikes last week, with policymakers projecting rates will move higher than previously anticipated in response to surprisingly persistent price pressures and labour-market strength. Meanwhile, US short-term inflation expectations fell in early June to a more than two-year low. This fuelled consumer sentiment higher.
According to Tom Lee, Fundstrat’s head of research, price increases could ease off, potentially this year and possibly amid a decrease in the shelter or rent component of the consumer-price index. Lee suggests that this has led to much of the stock market gains year-to-date and that the Federal Reserve can end the “inflation war” – also known as pivot- when the public perceives that inflation has been broken. He estimates that this will be sometime in 2023.
Goldman Sachs has a trade for those who share its perspective that price increases will remain sticky. The firm’s strategists recommend that investors buy one-year swaps to bet on inflation reaching higher than its current market pricing. It will be interesting to see how the next few months play out and whether markets will begin to adjust their expectations regarding inflation rates.