US inflation won’t come down as quickly as markets are pricing: Goldman Sachs

They see limited ability for those things to lower prices, and say markets are also ignoring the potential for “delayed-onset inflation” in sectors like health care. “Although we expect further declines in inflation going forward, markets appear considerably more optimistic than we are about the pace of cooling,” the strategists said.

Also Read: S&P500, Nasdaq edge lower after FOMC hits pause on rates; signals 2 small hikes by year-end

Federal Reserve Chairman Jerome Powell-led Federal Open Market Committee (FOMC) paused its series of interest-rate hikes on June 14, retaining at 5-5.25 per cent, but policymakers projected that two small rate hikes is likely to come by the end of the year. in response to surprisingly persistent price pressures and labor-market strength. 

Speaking after the release of the Fed statement, Fed Chairman Jerome Powell noted that as the Fed has paused rates, “we’ve covered a lot of ground and the full effects of our tightening have yet to be felt.” Powell added nearly all Fed officials expect more rate rises this year, and he noted that even as officials have not decided what they will do with rates at coming meetings, the July FOMC gathering is a “live meeting” which could bring another rate increase.

Meanwhile, US short-term inflation expectations fell in early June to a more than two-year low, helping drive consumer sentiment higher. The US consumer price index (CPI) edged up 0.1 per cent last month as petrol prices fell, after increasing 0.4 per cent in April. 

In the 12 months to May, the CPI climbed 4 per cent, the smallest year-on-year increase since March 2021, after rising 4.9 per cent in April. The core CPI increased 0.4 per cent in May, however, the same percentage rise for the third straight month.

Fundstrat’s head of research, Tom Lee, said in a note that price increases could ease off, potentially this year and possibly amid a drop in the shelter or rent component of the consumer-price index. 

The stock market is beginning to come around to that view and it probably explains much of the gains year-to-date, he added. “The Fed can end this inflation war (aka pivot) when the collective public believes inflation is broken,” Lee said, and his best guess is that it “will be sometime in 2023.”

Goldman has a trade for those who share the viewpoint that price increases will remain sticky. The firm’s strategists recommend investors buy one-year swaps to bet on inflation realizing higher than current market pricing, according to Bloomberg.

Updated: 17 Jun 2023, 04:49 PM IST