“Although the pressure is unlikely to subside quickly, I remain confident in the basic view that both headline and core inflation will fall significantly next year,” said Jan Hatzius, Head of Global Investment Research of Goldman Sachs in a research newsletter.
According to Hatzius current 30-year highs in inflation have been driven by rises in the prices of commodities and supply-constrained goods such as autos, sporting equipment, furniture and other durable goods.
While we can debate how long it will take for those prices to normalize, I would be astonished if they continue to rise at anywhere near the recent rate, and assuming they don’t already removes a large part of the inflationary impulse next year,” said Hatzius. “Right now, these goods are contributing around 130bp to core PCE, which we expect will swing to a 55bp drag by end-2022.”
According to Hatzius energy shortages in Europe and China, which have caused inflation from commodity prices, are also likely to moderate significantly next year.
“The direction of travel in terms of lower inflation is generally clear. That said, I’m much less certain about the precise destination of core PCE,” added Hatzius. “The prospect of 3% core PCE inflation by the end of 2022 seems unlikely, but whether it settles at 2%, 2.5% or even marginally higher depends not only on what happens with goods prices, but also with wages and rents.”