Goldman expects a ‘significant’ decline in inflation next year, sees PCE below 3%

By Senad Karaahmetovic

Jan Hatzius, the chief economist of investment bank Goldman Sachs, projects that the U.S. will witness a “significant” decline in inflation next year. PCE, which stands for Personal Consumption Expenditures, is seen falling to 2.9% by December next year, down from 5.1% in September this year. PCE measures the prices that people pay for goods and services.

The projection, which calls for inflation to “finally” fall, is based on three key factors: 1) easing of supply chain constraints, 2) peak in shelter inflation after reopening, and 3) slower wage growth.

The fall in inflation will be mostly led by the first factor with Goldman projecting that the contribution of supply-constrained goods categories to core inflation will go from a boost of +0.6pp currently to -0.4pp by late 2023.

“The supply of semiconductors in particular has improved dramatically, with automotive microchip shipments now 42% above 2019. This has already catalyzed a 5% decline in the used car CPI, and we assume another 15% drop in 2023. We expect new car prices to begin falling as well,” Hatzius said in a client note.

While PCE should fall below 3%, Hatzius warns that core services inflation is likely to fall at a slower pace. This type of inflation is projected to fall to “a still-high 4.4% year-on-year next December.”

“This reflects a lower but still elevated pace of shelter inflation later in the year, as well as an outright increase in healthcare inflation in part reflecting the largest Medicare fee update in at least 15 years,” Hatzius concluded.

The (CPI), a key inflation barometer, rose 7.7% in October compared to a year-ago period and 0.4% on a basis.

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