Goldman Sachs Analysts Maintain Outlook Despite High Inflation Reports
Despite recent unexpectedly high inflation reports, Goldman Sachs analysts Spencer Hill, CFA and Ronnie Walker remain optimistic about a steady return to the Federal Reserve’s 2% inflation target. They anticipate rate cuts as early as the first half of this year.
In a note shared on Monday, Hill and Walker expressed that they are “not too concerned” about the robust figures presented in the January Consumer Price Index (CPI) and Producer Price Index (PPI) reports. They attribute January’s price changes to cyclical volatility, commonly known as the “January effect,” which typically sees a deceleration in inflation rates by February.
One notable surprise for the analysts was the 0.56% spike in owners’ equivalent rents (OER), marking the most significant deviation from the primary rent measure since 1995. OER represents a substantial portion of core CPI (34%) and core PCE (13%), making its impact significant. Goldman Sachs highlights that OER surged due to a rebound in the housing market and a notable affordability gap between buying and renting, redirecting potential buyers to the rental market.
The recent CPI report also highlighted the January effect, with several labor-intensive services categories experiencing price adjustments at the start of the year. This adjustment is seen as a response to the cost pressures experienced in 2023. Despite the volatility in January’s data, Goldman Sachs believes that these fluctuations will not significantly alter the inflation trajectory for the rest of 2024, leading to a modest increase in their core PCE forecast for the year.
Looking ahead, Goldman Sachs maintains its prediction of a rate cut in May, based on the January FOMC statement suggesting rate reductions could occur once inflation shows sustainable movement towards the 2% target. Hill and Walker anticipate core PCE inflation to decrease to 2.5% by the May meeting, with further declines expected in the following months. They forecast a series of five 25 basis point cuts in the Fed funds rate throughout the year, starting with the May meeting.
However, the analysts note that the upcoming February CPI and PPI reports will be crucial in confirming whether the January increase in OER and non-housing services inflation was indeed temporary. Overall, Goldman Sachs remains optimistic about the outlook for inflation and monetary policy in the coming months.
In conclusion, despite recent high inflation reports, Goldman Sachs analysts maintain their outlook for a return to the Federal Reserve’s 2% inflation target and anticipate rate cuts as early as the first half of this year. The upcoming months will be critical in confirming the temporary nature of the recent inflation spikes.
