The Fed’s favored inflation gauge is at its highest since 1992, but Goldman Sachs says this ‘one-off inflationary boost’ will soon flip to a ‘one-off disinflationary drag’

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  • The core PCE price index, the Federal Reserve’s favorite measure of inflation, rose in May at its fastest since 1992.
  • Goldman Sachs analysts said this “one-off inflationary boost” will over time become a “one-off disinflationary drag” over time.
  • They predict that core PCE inflation will drop to 3% by the end of 2021, and slip further to 2% by December 2022.
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The Federal Reserve’s favored measure of inflation rose at its fastest pace since 1992 last month, driven primarily by price rises in products like cars, chips and furniture, but Goldman Sachs said this rise in inflation is temporary and will reverse itself over time.

The core Personal Consumption Expenditures price index, which strips out volatile food and energy prices, showed on Friday that personal spending had stagnated and inflation had picked up in May by 3.4% year-over-year.

Hold-ups in the supply chain – for goods such as semiconductors – and in global shipping have helped drive prices for consumer goods above pre-pandemic levels, Goldman Sachs analysts said in a research note Sunday.

On the demand side, coronavirus stimulus checks have pushed up buying of more expensive purchases, they noted. As a result, consumers are paying higher prices for new and used cars, consumer electronics, computer chips, furniture, appliances, and sports equipment.

“Prices in supply-constrained categories are likely to remain firm for at least a couple more months, but should eventually partially revert to pre-pandemic trends,” the analysts wrote. “This means that the current one-off inflationary boost will eventually become a one-off disinflationary drag.”

Goldman Sachs predicts that core PCE inflation will drop to 3% by the end of 2021, and slip further to 2% by December 2022, pulled lower by the falls in those product categories and as the boost from the reopening of the travel sector fades.

The Fed uses core PCE as its primary gauge of inflation, and it has signaled it will let inflation run above 2% for a time to allow the labor market to recover from the impact of the pandemic. It expects any jump in inflation during the recovery will be transitory, and a high rate of year-on-year price growth is seen as stemming from a comparison with levels in the early phases of the pandemic.

The supply and demand pressures will ease at different rates in the affected categories, the Goldman Sachs analysts said. Semiconductors should shake off their recent big price rises by the end of this year as the shortage improves, though the market is likely to stay under pressure until 2023, they forecast. Auto production could start to return to normal as early as the third quarter this year, as plants work through the summer shutdown, the analysts believe.

This return to normal will be brought on by a range of factors, such as growth in production capacity, better usage of current production resources, and an end to the global supply-chain snags.

“In short, the global goods sector is best thought of as facing a number of serious disruptions and challenges as the world economy recovers from the pandemic, not as having been pushed to its productive limits by the current level of demand,” the analysts said.

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US stocks climb as economic optimism overshadows rise in inflation

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The New York Stock Exchange stands in lower Manhattan.

  • US stocks trade higher on Friday as investors shrug off fresh data showing a rise in inflation.
  • The Personal Consumption Expenditures price index gained 0.6% in April and 3.6% year-over-year as American spending rebounded.
  • “This report puts the Fed in a really good place, inflation is up, but real yields are still low,” an expert said.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

US stocks trade higher on Friday as investors shrug off fresh data showing a surge in inflation.

The Personal Consumption Expenditures price index – a key measure of domestic inflation – gained 0.6% through April, the Commerce Department announced Friday, as American spending rebounded.

The jump is the largest single-month gain since 2008, in line with the median estimate of a 0.6% increase from economists surveyed by Bloomberg.

The PCE index also notched a 3.6% year-over-year gain, surpassing the median estimate of 3.5%

“This report puts the Fed in a really good place, inflation is up, but real yields are still low,” Jamie Cox, managing partner for Harris Financial Group, said in a statement. “This is basically a transitory sweet spot.”

US stocks closed up Thursday, with the Dow Jones leading the S&P 500 and Nasdaq composite higher. The move came after weekly jobless claims fell to a fresh post-pandemic low, at 406,000.

Here’s where US indexes stood shortly at the 9:30 a.m. ET open on Friday:

Shares of AMC resumed their blistering rally in early Friday trading, jumping more than 10% to approach $30 – the highest price in years. As of Friday, AMC has been on a five-day hot streak amid hype from retail traders on Twitter and Reddit, and short-sellers are taking a major hit.

In the digital asset space, trading platform eToro added two decentralized finance tokens, Aave and Yearn.Finance YFI, to its trading offering this week, alongside crypto tokens Compound COMP and Decentraland MANA. DeFi has gained traction amongst crypto investors in recent weeks after having been long overlooked on account of its complex nature.

Meanwhile, the newly launched Crypto Council for Innovation, an industry group that includes heavyweights such as Square, Fidelity, Coinbase, and Paradigm, is looking for a new boss, DealBook first reported Friday. The news of CCI’s hunt for new leadership comes as authorities are mulling ways to increase oversight of crypto.

Oil prices were higher. West Texas Intermediate crude jumped as much as 0.70%, to $67.32 per barrel. Brent crude, oil’s international benchmark, rose 0.46%, to $69.78 per barrel.

Gold fell as much as 0.23%%, to $1,893.64 per ounce.

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