The Federal Reserve’s preferred measure of inflation will fall below 3% by the end of next year as supply constraints ease, the cost of housing falls and the labor market cools, according to Goldman Sachs . Such an outcome may allow the Federal Reserve to be less aggressive in its interest rate hiking cycle as its strives to push inflation back down to its 2% target. Markets are highly sensitive to the issue, with stocks and bonds rallying sharply at the end of last week after consumer price data for October came in softer than expected.
The S&P 500
rose by 5.9% last week, its best showing since late June. The tech heavy Nasdaq Composite
soared 8.1%, its best weekly performance since March. In a note published over the weekend, Goldman’s economic research team led by Jan Hatzius, said that the core price consumption expenditures index, the gauge of price pressures that strips out volatile items like food and energy which is closely watched by the U.S. central bank, will drop from the current level of 5.1% to 3.5% by the middle of 2023 and may hit 2.9% by December . “We expect core inflation to fall significantly in 2023 for three key reasons,” wrote Goldman. ” 1) a negative swing in the contribution from supply-constrained goods categories, following supply-chain improvements, 2) a peak in shelter categories reflecting a further rebound in vacancies and a waning boost from reopening and the return to cities, and 3) slower wage growth, reflecting the c …