Goldman Sachs: Inflation Now a Larger Threat to Global Economy Than COVID-19

Customers shop for produce at a supermarket in Chicago, Ill., on June 10, 2021. (Scott Olson/Getty Images)

Goldman Sachs warned that soaring inflation is a more significant threat to the global economy than the COVID-19 pandemic, adding fresh pressure to the Biden administration and the Federal Reserve to take action.

The investment banking giant said (pdf) on Nov. 8 that the Federal Reserve will have to start raising interest rates, coming as the Department of Labor reported this week that the year-over-year inflation for consumer prices reached 6.2 percent in October, or the highest rate of rising prices in about 30 years.

Due to medical advancements slowing the spread of COVID-19, Goldman said it expects a reduction in consumer fear over the virus. As a result, rising inflation could replace COVID-19 as the primary issue with broader U.S. economic recovery.

“This means that the biggest risk to the global economy may no longer be a renewed downturn because of fresh virus outbreaks, but may now be higher inflation because of tight goods supplies and excessive wage pressure,” said the firm.

It continued to say that analysts expect some of the supply chain crunch to ease over the next year, “at present the stress on supply chains is substantial and inventories in semiconductors, durable goods, and energy markets are very low.”

Even “a moderate production outage resulting from COVID outbreaks in China, an energy demand spike related to a cold winter, or other short-term disruptions could have sizable economic effects,” Goldman warned.

The Department of Labor’s consumer price index report, released Nov. 10, noted that fuel prices have spiked 59 percent since October 2020, whereas overall energy prices have risen 30 percent for the 12-month period. Food prices also rose about 5.3 percent year-over-year, with meat, poultry, fish, and eggs collectively seeing an 11.9 percent increase from the previous October.

“The monthly all items seasonally adjusted increase was broad-based, with increases in the indexes for energy, shelter, food, used cars and trucks, and new vehicles among the larger contributors,” said the agency, adding that the “gasoline index increased 6.1 percent” in just a month.

The increase in price levels is already proving to be politically perilous for President Joe Biden, who has attempted to link U.S. economic recovery with his Build Back Better agenda that includes a $1 trillion infrastructure bill and a larger, $1.75 trillion social spending measure that’s still being debated in Congress.

In a statement released by the White House this week, Biden provided little detail on how his administration would address the burgeoning inflation crisis, which some analysts have claimed may mirror the 1970s “stagflation” era when the United States and other developed economies saw rapid inflation and high unemployment rates.

Again calling for Congress to pass his agenda items, Biden said he is directing the National Economic Council to focus on reducing energy costs for American consumers. Biden also asked the Federal Trade Commission to deal with “market manipulation or price gouging in this sector.”