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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Inflation nears decade high as reopening juices price growth across the economy

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Bolstered by three rounds of stimulus checks, US consumers are spending more.

  • The PCE price index – a popular inflation gauge – rose to 3.5% from 1.7% in the first quarter.
  • The measure signals that reopening and stimulus boosted demand, lifting prices at a nearly decade-high rate.
  • The Fed expects inflation to climb but only temporarily, before fading to normal levels.
  • See more stories on Insider’s business page.

The inflation that economists and the Federal Reserve have been warning of for months has arrived.

The Personal Consumption Expenditures price index – among the most popular measures of nationwide price growth – rose in the first quarter to 3.5% from 1.7%, the Commerce Department said Thursday. The reading marks the second-fastest pace of price growth since 2011, surpassed only by a 3.7% rate in the third quarter of 2020.

Core PCE inflation, which leaves out volatile food and energy prices, rose to 2.3% in the first quarter from 1.3%.

The stronger inflation was largely attributed to the quarter’s economic rebound. US gross domestic product grew at an annualized rate of 6.4% in the first three months of 2021, according to the Commerce Department. That rate signals the second-strongest quarter of expansion since 2003, surpassed only by the record-breaking surge seen in the third quarter of last year.

The quarter ending in March saw stimulus passed by former President Donald Trump and President Joe Biden drive a sharp increase in spending. Widespread vaccination and falling COVID-19 case counts also boosted economic activity as governments eased lockdowns and businesses reopened.

The uptick in price inflation mirrors a similar signal from the Consumer Price Index from earlier in April. The inflation gauge rose 0.6% from February to March, slightly exceeding economist forecasts. More remarkable was a 2.6% year-over-year gain that market the strongest jump in price growth of the pandemic era.

Inflation was at the center of the debate over new stimulus, with Republicans and even moderate Democrats warning that a colossal package could spark rampant price growth and create a new economic crisis.

On the surface, the latest data suggests those warnings were correct. Yet the Fed has long anticipated that any spike in inflation through the recovery would be “transitory” and quickly fade. For one, year-over-year measures of price growth are somewhat skewed by data from the first months of the pandemic, when initial lockdowns saw price growth turn negative. That dynamic, known as base effects, leaves a lower bar for the present-day readings to clear.

The pickup is also unlikely to reverse the decades-long trend of price growth landing below the Fed’s target, according to Fed Chair Jerome Powell.

“An episode of one-time price increases as the economy reopens is not the same thing as, and is not likely to lead to, persistently higher year-over-year inflation into the future,” the central bank chief said Wednesday. “It is the Fed’s job to make sure that does not happen.”

The Fed adjusted its framework in August to pursue inflation that averages 2% over time, as opposed to targeting steady price growth at a 2% rate. The change signals the central bank will allow inflation to run above the 2% threshold for some time as the country recovers. Powell has said that the low-inflation environment of the late 2010s suggest the Fed can run the economy hot in hopes of reaching maximum employment.

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