Goldman still expects U.S. inflation to fall significantly as markets alarmed by recent rise

Goldman
Sachs
still
expects
stubbornly
high
U.S.
inflation
to
ease
over
the
coming
months,
despite
investors
slashing
bets
for
Federal
Reserve
interest
rate
cuts,
after
yet
another
print
showed
that
consumer
prices
remain
sticky.

The

consumer
price
index
accelerated
at
a
faster-than-expected
pace
in
March,
according
to
data
published
Wednesday
by
the

Labor
Department’s
Bureau
of
Labor
Statistics.

The
CPI,
a
broad
measure
of
goods
and
services
costs
across
the
economy,
rose
0.4%
for
the
month,
putting
the
12-month
inflation
rate
at
3.5%.
This
was
an
acceleration
from
the
3.2%
hike
jotted
in
February.

The
report

roiled
investor
confidence
in
the
Fed’s
rate-cut
outlook,
sent
financial
markets
into
retreat
and
prompted
Treasury
yields
to
spike.

Traders
now

anticipate
an
initial
rate
reduction
from
the
U.S.
central
bank
in
September,
following
months
of
penciling
in
the
June
meeting
as
the
likely
start
of
Fed
policy
easing.

In
the
Goldman
Sachs
view,
the
U.S.
CPI
will
fall
back
to
2.4%
this
year,
down
from
the
current
annualized
rate
of
3.5%.

“The
problem
is
that
you
have
certain
parts
of
the
inflation
bucket
right
now
that
are
continuing
to
push
things
up,”
Christian
Mueller-Glissmann,
head
of
asset
allocation
research
at
Goldman
Sachs,
told
CNBC’s “Street
Signs
Europe”
on
Thursday.

“In
the
last
print,
it
was
the
transportation.
We
obviously
have

oil
prices
currently
going
up,
and
that’s
certainly
something
that
has
been
a
bit
stronger
than
what
we
initially
anticipated,”
Mueller-Glissmann
said.

He
added
that
the
inflationary
impact
of
rising
oil
prices
will
likely
be
limited,
because
the
bank
expects
that
OPEC
will
eventually
bring
spare
capacity
online.

Mueller-Glissmann
said
that
the
normalization
of
wage
inflation
was
one
of
the
core
reasons
why
Goldman
expects
U.S.
inflation
to
fall.
On
this
point,
he
conceded
that
there
were “more
question
marks”
for
the
U.S.
compared
with
Europe,
when
it
comes
to
wage
normalization.

“But
we
would
still
argue
that
a
lot
of
the
higher
frequency
indicators
of
job
openings,
for
example,
in
the
U.S.,
they
are
coming
down.
So,
the
labor
market
is
still
cooling
so
one
would
hope
that
would
let
wage
inflation
ease
a
bit.”

Last
month,
the
U.S.
central
bank
left
interest
rates
unchanged
for
the
fifth
consecutive
time,
in
line
with
expectations,
and
kept
its
benchmark
overnight
borrowing
rate
in
a
range
between
5.25%-5.5%.
At
the
time,
the
Fed
also
said
that
it
still
expects
three
quarter-percentage
point
cuts
by
the
end
of
the
year.

The
March
CPI
report
has

fueled
concerns
that
inflation
is
proving
sticker
than
previously
anticipated
and
appears
to
have
reaffirmed
the
cautious
tone
of
some
Fed
policymakers
in
recent
weeks.

Speaking
late
last
month,
Fed
Governor
Christopher
Waller
said
that
there
was “no
rush”
to
cut
the
U.S
central
bank’s
policy
rate.

Separately,
Atlanta
Federal
Reserve
Bank
President
Raphael
Bostic
has

said
that
he
now
expects
just
one
single
quarter-point
rate
cut
this
year,
compared
with
the
two
trims
that
he
had
previously
projected.

“We
shifted
from
a
Goldilocks
optimism
in
the
fourth
quarter
to
this
reflation
flirtation
since
the
beginning
of
the
year,
and
I
think,
so
far
so
good.
I
think
markets
have
dealt
really
well
with
that
shift
from
inflation
coming
down
and
a
lot
of
rate
cuts
coming
to
now
inflation
actually
staying
sticky,
and
[to]
rate
cuts
being
pushed
out,”
Mueller-Glissmann
said.

A
key
reason
for
why
that
has
been
the
case,
Mueller-Glissmann
said, “has
obviously
been
growth.”

“I
think
this
reflation
flirtation
is
not
just
about
inflation,
it
is
about
growth
as
well,
and
the
growth
has
actually
been
remarkably
good.
And
I’m
talking
about
both
the
corporate
sector,
especially
in
the
U.S.
[where]
the
earnings
have
been
good,
but
also
the
manufacturing
sector,
which
has
started
to
the
recover
—
and
the
consumer,”
he
added.

“It
really
matters
if
we
get
the
growth
to
continue
to
be
good.”

—
CNBC’s
Jeff
Cox
contributed
to
this
report.