Goldman Sachs issued a note after a lower-than-expected consumer inflation report for July saw the USD fall and stock markets rally sharply Wednesday. US consumer inflation hit +8.5% y/y vs +8.7% expected and Core CPI fell to 5.9% y/y vs 6.1% expected and 5.9% prior. CPI in July stalled m/m 0.0% m/m vs +0.2% expected and +1.3% prior. Core CPI rose +0.3% m/m vs +0.5% expected and +0.7% prior. GS in their note cited four reasons they believe Core inflation will have difficulty falling much more, at least until 2023.
Goldman Sachs 4 reasons for a limited Core CPI fall from here:
Goldman Sachs research led by chief economist Jan Hatzius says don’t expect core inflation to come down much from here.
They laid out four reasons why “downward pressure on goods prices will be more limited than hoped in the near term.”
However, GS expect a more sizable disinflationary impulse from core goods in 2023.
“These biases caused Inflation to be understated earlier in the pandemic—when generous fiscal support and constraints on spending opportunities made consumers more willing to buy premium brands and shop at full-price retailers. But they will cause inflation to be overstated now and in coming months.”
- The price of cars (a significant portion of core CPI) will likely stay high for months
- Inventories are likely to be extremely depressed for the rest of 2022, given ongoing production problems and high demand continuing
- For the last year, global supply chain problems and an increase in demand have inflated both used and new car prices
- Retailer excess inventory leading to discounts will hardly have any impact on prices
- Many retailers overstocked their inventories, GS estimates currently $20 billion—a number that translates to just 3% of annual retail spending and 0.5% of total core goods spending. If all that excess inventory were put on sale at a markdown of 20% it would only translate to 0.1% of downward pressure on inflation
Core Inflation y/y
- Discounting won’t have any direct impact on inflation but will work instead as an offset since many retailers are still announcing inflation-driven increases.
- “We do, however, continue to expect the strong dollar and easing supply-chain constraints to weigh on import prices later this year, and in turn on consumer goods prices by the first half of 2023,” the bank added.
4. Consumers have made changes in their shopping behaviors,
- Like switching to cheaper brands or pivoting to dollar stores to get their essentials. This is not reflected in the BLS’s data, creating substitution and outlet bias.
- “These biases caused inflation to be understated earlier in the pandemic—when generous fiscal support and constraints on spending opportunities made consumers more willing to buy premium brands and shop at full-price retailers,” wrote Goldman. “But [they] will cause inflation to be overstated now and in coming months.”
US Core CPI July 2022
Goldman estimates that core PCE inflation will sit at 4.5% year over year in December. As of June, core PCE inflation is currently at 4.8%. “A more sizable disinflationary impulse from core goods will likely have to wait until 2023,” wrote Goldman.
“Improving supply chains, falling commodity prices, and bloated inventories at retailers who over-ordered after experiencing extremely high demand last year have provided hope that a long-elusive disinflationary impulse from core goods prices might finally arrive,” wrote Hatzius’ team.
Source: Goldman Sachs
From the TradersCommunity Research Desk