Goldman Sachs have revised their US inflation forecast higher, citing Trump tariffs

This is via a Wall Street Journal interview with Goldman Sachs Chief Economist Jan Hatzius. Hatzius has, so far, stuck with his forecast for 3 interest rate cuts from the Federal Reserve in 2025, citing:

• I think a lot of the underlying reasons for disinflation are still intact
• for me, (its) hard to see how we’re reversing this underlying inflation process
• if you listen to Powell during the press conference, that seems to be where he’s coming out as well. And I agree with that.

Summary of Inflation Impacts:

• Hatzius foresees a manageable inflation environment, with continued progress toward the Federal Reserve’s 2% target.
• While specific risks, such as tariffs, could cause temporary upticks in inflation, underlying economic adjustments (wages, labor market) support a disinflationary trend.
• Sticky price components and seasonal effects will gradually align with overall disinflationary forces, reinforcing the downward trend in inflation

***

More detail on his inflation outlook:

• Current Outlook:

  • Hatzius expects core PCE (Personal Consumption Expenditures) inflation to be 2.4% by late 2025, down from the current 2.8%.
  • This revised forecast reflects a modest upward adjustment (from an earlier 2.1%) due to anticipated tariff impacts.

• Impact of Tariffs:

  • Tariffs are projected to add around 30 basis points (0.3%) to inflation.
  • Hatzius aligns with the Federal Reserve’s similar adjustment during their recent FOMC meeting, which also factored in tariff-related inflation pressures.

• Sticky Inflation Elements:

  • Some inflation components, such as auto insurance and other sectors with annual price adjustments, have contributed to higher backward-looking inflation.
  • Hatzius expects these effects to diminish over time, leading to less dramatic year-over-year price increases, particularly in early 2025.

• Underlying Drivers of Disinflation:

  • Labor Market Rebalancing:
    • Wage growth is decelerating, which supports lower inflationary pressures.
    • The labor market is gradually adjusting, helping to reduce cost-push inflation.
  • Economic Trends:
    • Continued disinflation trends are supported by broader economic stabilization and slower price adjustments in previously high-inflation areas.

• Seasonal Effects:

  • Hatzius highlights the potential for a smaller “January effect” in 2025, where price increases from December to January are less pronounced compared to previous years.
  • This will contribute to lower year-on-year inflation comparisons, improving the inflation outlook.

• Confidence in Forecast:

  • Despite some volatility in inflation readings (e.g., higher numbers in September and October), Hatzius remains confident due to:
    • Improvements in underlying inflation drivers.
    • A favorable trajectory for wage growth and labor market conditions.
    • Indications from November data that inflation is already moderating.

From Friday’s (20 December) data:

This article was written by Eamonn Sheridan at www.forexlive.com.