Goldman Sachs CEO Issues Warning on ‘Stickier’ Inflation

A customer checks prices while shopping at a retail store in Vernon Hills, Ill., on June 12, 2023. Nam Y. Huh/AP Photo

Goldman Sachs CEO David Solomon expects inflation to remain elevated for a longer period of time and warned that economic conditions have become “tougher” for lower-income consumers.

“After years of easy monetary policy and fiscal stimulus, economic conditions tightened at the fastest rate in 40 years, and yet there was not a recession,” Mr. Solomon wrote in a March 15 annual letter to shareholders. “The U.S. economy has proven more resilient than expected, and markets are predicting rate cuts, though I think inflation may prove stickier than many anticipate. Either way, the cost of capital is now materially higher, and markets are adjusting.” Startups and multinational companies are showcasing different situations in the current economic scenario.

“Startups and other early-stage companies are focused on talent, capital, and liquidity, as monetary tightening has impacted younger companies that have known only low interest rates … By contrast, the CEOs of multinational corporations are more focused on the structural forces shaping the global economy, particularly inflation, geopolitics, and generative AI.”

According to the CEOs, economic conditions for consumers have “gotten tougher,” especially at lower income levels. As a consequence, companies are beginning to see “behavioral changes” among consumers.

Mr. Solomon believes the U.S. Federal Reserve now has room to ease interest rates in case economic conditions deteriorate.

The 12-month annual inflation rate has been spiking under the Biden administration, jumping from 1.4 percent in January 2021 to hit a peak of 9.1 percent in June 2022.

Even though the annual inflation has cooled down to 3.2 percent as of February 2024, it continues to remain elevated. According to a Fox News analysis, prices are currently up by 18.49 percent compared to January 2021 levels.

In response to rising inflation, the Federal Reserve has been pushing up interest rates in an attempt to cool down surging prices. Since March 2022, the Fed has raised interest rates 11 times. As a result, the rate is currently at a two-decade high range of 5.25–5.50 percent.

A meeting of the policy-making Federal Open Market Committee (FOMC) is scheduled for March 19–20. However, the vast majority of interest-rate traders are not expecting any rate cuts from the meeting.

Since inflation is way above the 2 percent level, there is a lower probability of Fed officials agreeing to bring down interest rates. “The committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent,” the FOMC said in a statement back in January.

And with interest rates remaining elevated, investors will be wary about market conditions. This is because higher rates can suppress business activity. However, if the Fed were to lower rates, it could encourage spending and investment activity among consumers and businesses, triggering economic growth.

Struggling Americans

Elevated inflation has pushed up grocery prices along with other daily necessities, making the life of Americans difficult.

According to data from the Federal Reserve Bank of St. Louis, the average U.S. city price of uncooked ground beef has risen from $4.54 per pound in January 2021 to $5.47 in February 2024.

During this period, the price of a dozen Grade A large eggs jumped from $1.46 to $2.99. Average milk prices increased from $3.04 per gallon to $3.65 per gallon in January 2024.

Speaking to Fox News earlier this month, a diner said, “Every week we go and we spend about $300 [at groceries]. I have not seen a change at all. On the contrary, like it’s just going up … We just got a letter at home saying the rent is going to go up. Our insurance just went up, so everything just keeps going up and up and up … I haven’t seen the difference in anything.”

A Pennsylvania woman pointed out that “a gallon of orange juice is like $6.80 or around $6, and that’s at Walmart. Like you don’t really expect it to be that.”

“I have a home business, I do cookies, and I need a bag to put them in, and I buy the 150-count at Walmart. I used to get them for like $3, now they are like $6.50 or something like that. And it’s plastic … It’s never coming down. Nothing comes down,” she said.

The high inflation rate is expected to be a key factor in the 2024 presidential race. A December 2023 poll found that 52 percent of Americans were worried that inflation was the bigger problem facing the country, more than immigration, crime, and unemployment.

Senate minority leader Mitch McConnell (R-Ky.) slammed the Biden administration’s failure to control prices.

“Nearly two-thirds of voters today say our economy is worse than it was four years ago. Not even one in four think our country is on the right track. Barely a quarter of the country expects our economy to improve in the coming year,” he said, according to a news release on March 13.

“American consumers are shelling out a bigger portion of their income on groceries than at any point in the last 30 years ... Across the board, consumer prices are nearly 18 percent higher today than they were when President Biden took office. This is what ‘Bidenomics in action’ really means?”