Inflation deeply buried in a global economy: Goldman Sachs

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One of America’s top bankers says inflation is “deeply embedded” in the global economy. The Fed needs to tighten its monetary policy more if the inflation is more persistent than expected. And this would further slow the economy.

David Solomon, CEO of Goldman Sachs, says a combination of economic factors and the Russo-Ukraine war is eroding the confidence of consumers and businesses, contributing to stock market vulnerability. He highlighted that it’s unclear whether the situation will improve later this year.

Solomon told analysts that inflation is deeply entrenched in the economy and the unusual bit is that demand and supply are being affected by exogenous events, like the ongoing Covid-19 pandemic and the war in Ukraine. CEOs running big global businesses continue to see persistent inflation in their supply chains. Economists believe inflation will move lower in the year’s second half, but the signs are uncertain. Solomon pointed out that the already volatile markets across asset classes will remain choppy.

He expressed concerns that the campaign to flat inflation will take a toll on corporate confidence and consumer activity in the economy. As such, Goldman Sachs is treading cautiously and examining its spending plans. It will slow its rate of new hires, reduce the professional fees that it pays and likely reinstate the annual performance reviews for staff this year. Solomon shared that there will be more volatility and uncertainty in light of the current environment. As such, Goldman Sachs will manage its resources cautiously.

Ian Shepherdson of Pantheon Macroeconomics says core inflation has risen nearly 6% over the last year. It rose more slowly in June when compared to the previous month. He shared that the Federal Reserve has jacked up its benchmark interest rate for 2022 and is expected to hike it as much as three-quarters of a percentage point when policymakers meet next week. Shepherdson believes core inflation will fall faster than markets and the Fed expect.

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