Predictions are hard, especially about the future, as the old saying goes, but when you’re in the forecasting business what can you do?
Goldman released their 2024 inflation outlook late Sunday. It’s two-dozen pages long and not exactly amenable to any sort of summary treatment.
Notwithstanding the futility of forecasting, year-ahead inflation outlooks are worth highlighting given the Fed’s crossroads moment.
It’s possible America’s worst bout with inflation in a generation is nearly over and that if the Fed merely maintains rates at current levels (or slightly below) for a year, policy can facilitate a benign normalization in the labor market on the way to a mythical soft landing.
It’s also possible that inflation could re-accelerate amid ever higher home prices, commodities volatility, the escalating labor versus capital standoff, re-shoring, fiscal outlays to fund wars and so on.
If you ask Goldman, core inflation in 2024 will “reflect the interplay between two forces.” Those forces are, verbatim from the note:
- Disinflation from the advanced stage of rebalancing in the labor, housing rental and car markets, and
- An inflationary boost from pent-up cost pressures, primarily in healthcare
Happily, Goldman sees the crosscurrents “net[ting] out decisively to the downside, lowering core inflation during 2024 by 1pp to 2.4% at year-end.”
Obviously, labor market rebalancing is the linchpin. On that score, Goldman noted that the jobs-workers gap is down 3.5 million from the high, and now sits just 500,000 (give or take) from the level (two million) the bank believes “would be consistent with sustainable wage growth.”
The “sustainable” in “sustainable wage growth” is an allusion to the rate of pay increases consistent with price stability. The figure on the left, below, illustrates the point.
The figure on the right shows a meaningful drop in wage growth to levels consistent with 2.5% inflation in the medium-term.
In addition to the aggregate wage tracker used in the right-most figure, Goldman has a low-wage tracker. It too has moderated materially, which is important because it tracks PCE inflation in the services sector very well going back over three decades.
Goldman noted that services inflation excluding housing, healthcare and financial services “slowed to 2.9% annualized in the third quarter, down from 4.1% in Q2 and 6.8% on average in 2022.” If the bank’s labor market baseline proves correct, it’d be “consistent with a 2.8% annualized pace in 2024,” the bank’s Spencer Hill and Manuel Abecasis wrote, adding that “prices for most discretionary consumer services categories have caught up to the post-pandemic cost environment, which is characterized by a higher cost of labor, capital and intermediate inputs.”
The implication is that with the catching up process out of the way, the monthly trend in non-housing core services categories can stabilize.
As for shelter inflation, Goldman’s constructive (no pun intended) there too. Hill and Abecasis cited “strong multi-family fundamentals” in explaining what they described as a “huge supply response.” The 1.2 million apartments under construction (or at least permitted) represents “the largest pipeline since 1974,” they noted, adding that rental vacancy rates are back to pre-pandemic levels.
In addition, indexes of apartment rents suggest a rebalancing process that’s largely complete. Readily available rent measures showed just a +1.6% annualized pace of growth last quarter, down from what Hill and Abecasis dryly noted was a peak of 20+% during the re-opening renaissance and America’s “return to cities.”
Goldman estimates that most of the gap between rents for new and existing tenants has closed. Ultimately, the bank sees shelter inflation receding to 4.1% by December of next year, well less than half the peak annualized rate seen late in 2022.
I could go on. Hill and Abecasis certainly did. Their assessment was exhaustive. You might even call it exhausting. That’s not a criticism. It’s just to say that, coming full circle, macro predictions are rarely borne out, or at least not in full. It’s quite difficult, bordering on the impossible, to correctly forecast macro-level economic outcomes, so there’s a sense in which less can be more.
Nevertheless, I (sincerely) applaud the effort. As these things go, Hill and Abecasis did as fine a job as could reasonably be expected. Here’s the bottom line from Goldman, which I’ll present without further comment:
Taken together, we expect a significant decline in core PCE inflation next year, from 3.7% currently to 2.4% in December 2024. We forecast inflation for the broader “core services ex-housing” segment to fall from 4.3% YoY currently to 3.4% in December 2024, a smaller decline than suggested by our top-down models because of the relatively firmer outlook in healthcare and because the models have been surprised to the upside on net in recent quarters. Such an outcome would validate the Fed’s decision to leave interest rates unchanged at a restrictive level and would further reduce the odds of a resumption of the tightening cycle.
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