Goldman Sachs economists forecast ‘sharp decline’ in inflation next year

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Goldman Sachs says U.S. inflation will ease “significantly” next year as three key factors contributing to higher consumer prices continue to disappear.

Goldman economists see core PCE back to 2.9%

Last week, consumer prices were reported up for the month but not as much as expected. And that’s likely to continue moving forward as far as the Goldman Sachs economists are concerned.

Led by Jan Hatzius, the team now forecasts the Fed’s preferred inflation gauge to return to 2.9% by December of 2023. In comparison, the Core PCE Price Index currently sits a 5.1%.

Reasons cited for the positive view include easing in supply constraints, a potential decline in cost of housing, and slower wage growth.

S&P 500, though, is not celebrating the research note and is down about 1.0% at writing.

What does that mean for the stock market?

Theoretically, what Goldman Sachs’ economists are suggesting would be a positive for the equities market. Because if true, that could make the central bank change its stance on the monetary policy.

On CNBC’s “Squawk Box”, Linda Duessel of Federated Hermes agreed with the view that inflation could come down hard next year but said investors should also focus on another key factor – “earnings”.

Inflation has one-year lag with money supply. M2 is crashing down hard, so inflation will come down hard next year. What I think we have to focus on is earnings next year. Right now, you’re 17 times forward earnings, that’s too high.

For the year, the benchmark index is still down roughly 18%.  

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