Inflation May Get Much Worse This Summer—And Could Linger 'Many Years’

Topline

Economists at Goldman Sachs hiked their inflation projections this weekend and warned clients that recent strong price spikes seem similar to those that preceded record inflation decades ago, joining other experts in forecasting inflation will last longer than previously expected.

Recently strong inflation readings are beginning to rival those seen in the 1960s and 1970s—when … [+] rising prices culminated in recession and sparked a decade of lackluster stock-market returns, Goldman economists said Sunday.

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Key Facts

In a note to clients Sunday night, Goldman economists said they expect consumer prices to rise more quickly later this summer as transportation and health insurance costs continue to surge, pushing core inflation, which excludes volatile food and energy prices, from 6% in May to 6.3% in September.

Goldman expects health insurance and automobile prices—two of the largest contributors to inflation during the pandemic—should start “outright” falling by the end of this year as Covid-era growth begins to subside, pushing core inflation down to 5.5% at year-end and 2.4% in December 2023.

However, the economists also acknowledge core inflation has vastly outperformed expert projections this year, consistently rising more than expected over the last six months.

They note the surprise readings are beginning to rival those seen in the 1960s and 1970s—when long-lasting price spikes of more than 10% (solidly higher than the latest reading of 8.6% in May) contributed to prolonged periods of weak economic growth and sparked a decade of lackluster stock-market returns.

In a weekend note to clients, LPL Financial chief economist Jeffrey Roach was more bearish, saying the surge in travel-related demand is a “major concern” for inflation as housing, restaurant and accommodation prices reach new highs.

“Consumers may have to live in a world where inflation consistently runs hotter than the previous decade,” Roach said, citing concerns from central bankers like European Union’s Christine Lagarde, who last week warned there are “growing signs”—including the ongoing war in Ukraine—that suggest “supply shocks hitting the economy could linger for longer.”

Crucial Quote

“Policymakers must come to grips with a real possibility that inflation rates will not come down to their preferred targets for many years,” says Roach, adding the tight labor market is another uncertainty that could keep inflation above the Fed’s long-standing 2% target.

Tangent

Inflation ran rampant in the 1970s as multiple energy crises pushed oil prices up as much as 400%, all while central bankers prioritized efforts to improve the labor market—even if it meant risking further price spikes. It wasn’t until Paul Volcker took office as Federal Reserve chairman in 1979 that the Fed pivoted to fight inflation, and though the efforts were ultimately successful, they also yielded a recession in 1982.

What To Watch For

To help ease inflation, President Joe Biden is expected to possibly announce lower tariffs on certain Chinese goods, including clothing and school supplies, as soon as this week. However, some experts worry the move does nothing to address domestic supply chain issues driving up costs. The decision “probably won’t move the needle dramatically on inflation,” analyst Adam Crisafulli of Vital Knowledge Media said in a Monday email, though he says “aggressive” discounts set to start this month at major retailers like Walmart and Target could prove “far more important.”

Key Background

The Fed’s inflation-fighting interest rate hikes this year have tanked stocks and sparked growing fears of a recession. Major stock indexes plunged into bear market territory last month ahead of the central bank’’s largest interest rate hike in 28 years, and the gloomy sentiment has ushered in waves of layoffs among recently booming technology and real estate companies. “We don’t believe the Fed can stop the issues that are causing inflation on the supply side without absolutely wrecking the economy, but at this point, it looks like they are resigned to the fact that it must be done,” says Brett Ewing, chief market strategist of First Franklin Financial Services.

Inflation May Get Much Worse This Summer—And Could Linger ‘Many Years’—Experts Warn