Goldman Sachs forecasts a “significant” drop in US inflation in 2023

Multinational investment bank Goldman Sachs expects a drop “significant” of US inflation in 2023. After a year of economic hardship, losses, and historic declines, Goldman Sachs said U.S. inflation would decline in 2023.

The investment bank linked the upcoming inflation slowdown to easing supply chain constraints, lower wage growth and a spike in housing inflation.

According to Goldman Sachs economists led by Jan Hatzius, the firm expects the core PCE index to fall from the current 5.1 percent to 2.9 percent in December 2023. Economists added that a stronger dollar and lower commodity prices would impact inflation. Over the weekend, a member of the U.S. Federal Reserve Board of Governors, Christian J. Waller, warned that the central bank could reduce the pace of rate increases at its next meeting. He added, however, that this action does not amount to a “softening” of its inflation reduction goal.

Data compiled last week showed that U.S. inflation fell more than expected in October. The reading showed that inflation rose 7.7 percent last month, its slowest pace since the beginning of the year. In response to the decline in the growth rate, John Briggs of Natwest said:

“It certainly shows how lenient the markets have been, worried, and want to run on CPI if you get some kind of help here. The Fed will slow down and peak rather than continue to aggressively raise rates by 75 basis points.”

Specifically, Goldman Sachs analysts highlighted key points that could contribute to lower U.S. inflation by 2023. The economists mentioned that the effect of limiting the supply of goods could decrease. They predicted a drop from +0.7 percentage points currently to -0.4 percentage points by the end of next year. If this happens, it will account for nearly 50% of the decline in overall core inflation.

According to Goldman Sachs, the rebound in auto and consumer goods inventories could also contribute to lower inflation next year. Auto chip shipments are also up 42% from 2019 figures. In addition, year-over-year housing inflation is expected to peak, which is another reason to expect lower core inflation. There are currently 1 million apartments under construction, which is causing a rebound in rental vacancies. According to Goldman, vacancies will likely return to pre-pandemic levels by 2023.

In addition, analysts said slower wage growth could reduce upward pressure on services inflation in the coming year. They expect year-over-year wage growth to fall by 1.5 percentage points to 4 percent next year, leading to lower inflation in labor-intensive service categories. The analysts wrote:

“In total, we expect core consumer price inflation to fall significantly.”