2022 Inflation Outlook - Goldman Sachs - 071121

7 November 2021 | 10:57PM EST
US Economics Analyst
2022 Inflation Outlook: Getting Worse Before It Gets

Better (Hill/Mericle)
n Inflation has risen to a 30-year high, driven by a surge in durable goods prices. Jan Hatzius
+1(212)902-0394 | jan.hatzius@gs.com
Our core view remains that the underlying supply-demand imbalances will, as Goldman Sachs & Co. LLC
Chair Powell said last week, largely work themselves out, leaving inflation near Alec Phillips
+1(202)637-3746 | alec.phillips@gs.com
the Fed’s goal. But it is now clear that this process will take longer than initially Goldman Sachs & Co. LLC
expected, and the inflation overshoot will likely get worse before it gets better. David Mericle
+1(212)357-2619 |
david.mericle@gs.com
n The first and most important question for the 2022 inflation outlook is whether Goldman Sachs & Co. LLC
supply-demand imbalances in the goods sector will moderate enough for prices Spencer Hill, CFA
+1(212)357-7621 | spencer.hill@gs.com
to begin to normalize. We expect supply chain disruptions to be gradually Goldman Sachs & Co. LLC
For the exclusive use of Goldman Sachs Clients
overcome and demand for goods to moderate as services spending rebounds Joseph Briggs
+1(212)902-2163 |
and the peak fiscal boost fades. As inventory is rebuilt, the goods sector should joseph.briggs@gs.com
Goldman Sachs & Co. LLC
transition from an unusual environment of scarcity back to an environment of
Ronnie Walker
abundance in which competition will bring down elevated prices. We expect this +1(917)343-4543 |
ronnie.walker@gs.com
process to start by the second half of next year and to extend into 2023. Goldman Sachs & Co. LLC
n The second key question is whether wage growth will cool down now that
enhanced unemployment benefits have expired. Over the last half year, labor
shortages pushed wage growth to a 5-6% annualized pace that, if sustained,
would likely be incompatible with 2% inflation. We expect wage growth to slow
to just over 4% as labor supply returns, stronger than last cycle but—after
netting out productivity growth—consistent with the Fed’s inflation goal.
37d8825a338041d9af856c7eea795cd9
n The third key question is how hot shelter inflation will get in the tightest national
housing market since the 1970s. Alternative rent measures have already spiked,
and we expect labor market recovery and spillover effects from the house price
boom to push the official shelter measure above 4½% by end-2022. Faster
growth of wages and rents should provide more persistent inflationary pressure
in coming years, keeping core inflation moderately above 2% this cycle, above
the pace seen last cycle and in line with the Fed’s goal under its new framework.
n Prolonged supply-demand imbalances, strong wage growth, and accelerating
rents will leave core PCE and especially core CPI quite high for much of next
year. But as supply-constrained categories shift from a transitory inflationary
boost to a transitory deflationary drag, we expect core PCE inflation to fall from
4.4% at end-2021 to 2.3% at end-2022 and 2.1% at end-2023.
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Goldman Sachs US Economics Analyst
2022 Inflation Outlook: Getting Worse Before It Gets Better
Inflation surprised sharply to the upside this year and now stands at a 30-year high,
driven mainly by a surge in durable goods prices (Exhibit 1). Services inflation has risen
too, fueled by faster growth of wages and rents, but it has only returned to mid-2000s
levels that should prove more compatible with the Fed’s new inflation goal in the
medium run. The overshoot has come from durable goods.
It is now clear that resolving the supply-demand imbalances underlying the surge in
durable goods prices will take some time. As a result, the inflation overshoot is likely to
get worse before it gets better, with core PCE on track to rise above 4% year-on-year
and core CPI above 5% in coming months.
But we do not think that aggregate demand is on an unsustainable trajectory or that

inflation expectations have come unanchored, and the overshoot should therefore
ultimately prove transitory. Our core view remains that the current imbalances will, as
Chair Powell said last week, largely work themselves out, bringing inflation down to
moderately above 2%, as Fed officials desire. Every day brings new anecdotes about
supply chain struggles in the press, from retailers having to charter their own ships to
import goods through unclogged second-tier ports, to parents taking their kids to theme
parks for the holidays because popular presents are out of stock. But where others see
an economy in disarray, economists see businesses and consumers responding to price
signals in ways that restore the balance of supply and demand—that is, a market
economy functioning the way it is supposed to.
Exhibit 1: Core Inflation Has Reached the Highest Rate in 30 Years, Driven Mainly by Durable Goods
Percent change, year ago Percent change, year ago Percent change, year ago Percent change, year ago
4.5 Core PCE Inflation 4.5 8 Core PCE Inflation 8
7 Core Durable Goods 7
4.0 4.0
Core Nondurable Goods
37d8825a338041d9af856c7eea795cd9
6 6
3.5 3.5 Core Services
5 5
3.0 3.0 4 4
3 3
2.5 2.5
2 2
2.0 2.0
1 1
1.5 1.5 0 0
-1 -1
1.0 1.0
-2 -2
0.5 0.5
-3 -3
0.0 0.0 -4 -4
1990 1995 2000 2005 2010 2015 2020 2005 2007 2009 2011 2013 2015 2017 2019 2021
Source: Bureau of Economic Analysis, Goldman Sachs Global Investment Research
7 November 2021 2
A Long Road to Supply Chain Recovery

The first and most important question for the 2022 inflation outlook is whether
supply-demand imbalances in the durable goods sector will moderate enough for prices
to begin to normalize.
On the demand side, consumption of durable goods has been elevated because of
pandemic preference shifts and generous fiscal support that pushed disposable income
far above trend (Exhibit 2). We expect demand to moderate slightly next year as
services spending rebounds and peak fiscal and stay-at-home boosts fade. But we
expect only a modest drop-off in demand for durables, despite its elevated level,
because shortages and high prices this year have likely deferred some demand, and
because households can partly offset the decline in their flow of income by drawing on
their stock of excess savings.
Exhibit 2: Durables Demand Should Moderate as Services Demand Recovers and the Fiscal Boost Fades
Index, 2019Q4=100 Index, 2019Q4=100 Trillions of 2012 dollars, annualized Trillions of 2012 dollars, annualized
140 Real Consumption by Type 140 20 Real Disposable Income 20
$1400
Durable Goods stimulus
checks
130 130
Nondurable Goods 19 19
Services
120 120
18 18
$1200
stimulus $600
110 110 checks stimulus
checks
17 17
100 100
GS Forecast 16 16
90 90
15 15
80 80
GS Forecast
70 70 14 14
2018 2019 2020 2021 2022 2023 2018 2019 2020 2021 2022 2023
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On the supply side, a variety of problems—Covid-driven factory shutdowns, disruptions

to semiconductor production, port closures and congestion, and widespread labor
shortages—have produced supply chain disruptions that are historic in scope and
severity (Exhibit 3). The good news is that US producers report that the main obstacles
to meeting demand are not insufficient plant and equipment but rather shortages of
critical inputs and labor, and 2022 should see meaningful progress on resolving input
shortages, labor shortages, and shipping delays.
7 November 2021 3
Exhibit 3: Supply Chain Disruptions and Shipping Congestion Have Reached Historic Levels
Z-Scores Z-Scores Count Millions of tons deadweight, 7-day mov. avg.
Current Supplier Delivery Times,
6 Business Surveys 6 80 30
Container Ships Anchored at Port of L.A.
5 Longer Range 5 and Port of Long Beach (left)
delivery Average 70
Stranded Tonnage, US Ports (right) 25
4 4
60
3 3
20
50
2 2
1 1 40 15
0 0
30
10
-1 -1
20
-2 -2
5
10
-3 -3
-4 -4 0 0
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21 Jul-21
Source: Federal Reserve, Institute for Supply Management, Markit, Marine Exchange of Southern California, Goldman Sachs Global Investment Research
Semiconductors have been the most important input in short supply because of their
many downstream uses, especially in autos. Recovery here will come in three stages.
The first stage should begin in 2021Q4 as imports of semiconductors from Asia rebound
from a Q3 dip caused by Covid-related factory shutdowns, which should restore US auto
production to normal levels (Exhibit 4, left). The second stage will come in 2022H2 as
new capital investment in existing semiconductor plants begins to yield more output.
But a third stage of expanding capacity further with entirely new plants is needed to
keep up with rapidly rising semiconductor demand (Exhibit 4, right), and this will take
until well into 2023.
Exhibit 4: The Semiconductor Shortage Should Improve in the Short Run As Production in Asia Recovers from the Delta Wave, but More
Capacity Will Be Needed to Fully Meet Rapidly Rising Demand
37d8825a338041d9af856c7eea795cd9
Percent change vs. 2017-2019 Percent change vs. 2017-2019 Units Units
5 5 350 Number of Automotive Semiconductors per Vehicle 350
298
0 0 300 300
-5 -5 250 250
212
-10 -10 200 200
150 134 150

-15 -15
97
100 100
-20 -20 61
Texas power crisis, 50 50
-25 Japan factory fire -25
US Motor Vehicle Assemblies (left) 0 0

-30 -30
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Unit Imports of Automotive Semiconductors from

Japan, Taiwan, Malaysia, and Vietnam
-35 -35 Note: Calculated as global shipments of automotive microprocessors and
Sep-20 Dec-20 Mar-21 Jun-21 Sep-21 automotive analog semiconductors divided by global production of light vehicles.
2021 data reflect first three quarters annualized.
Source: Department of Commerce, IHS Global Insight, Company data, Goldman Sachs Global Investment Research
7 November 2021 4
Higher production and somewhat lower demand should eventually leave enough of a
surplus to start rebuilding inventories. The dramatic depletion of inventories during the
pandemic means that this process will take time (Exhibit 5). We expect the inventory
rebuild to start in 2022, but it will clearly be a multiyear process, and automakers warn
that it might not begin in their sector until 2023.
Exhibit 5: Rebuilding Depleted Inventories Will Eventually Put Downward Pressure on Goods Prices
% of avg. 2019 level % of avg. 2019 level Ratio Retail Inventories-to-Sales Ratio, Excl. Cars Ratio
110 New Car Inventories 110 1.4 1.4
100 100
90 90
1.3 1.3
80 80
70 70
60 60
1.2 1.2
50 50
40 40
30 30
1.1 1.1
20 20
10 10
0 0 1.0 1.0
Jan-19 Jul-19 Jan-20 Jul-20 Jan-21 Jul-21 2015 2016 2017 2018 2019 2020 2021
Source: Department of Commerce, Census Bureau, Goldman Sachs Global Investment Research
As inventory is restored, the goods sector should transition from an environment of

scarcity back to an environment of abundance, which should in turn restore competition
and bring down elevated prices. After all, it is only in the context of the current
shortages that consumers would make decisions as strange as paying new-car prices
for used cars and that retailers would eliminate normal holiday sales.
Our inflation forecast builds in assumptions that supply-constrained categories will see
37d8825a338041d9af856c7eea795cd9
moderate degrees of price level reversion toward pre-pandemic trends next year (Exhibit
6, left). Our projections for each category depend on the views of our sector analysts
on the outlook for supply and demand, the degree of price flexibility for each item, and
the extent to which higher effective prices have been due to reduced promotional
activity—which is likely to return eventually—rather than harder-to-reverse increases in
sticker prices. Where possible, we also take account of company pricing
announcements.
Our assumptions imply that supply-constrained categories will swing from a 130bp
boost to core PCE inflation at end-2021 to a 55bp drag at end-2022 and a 50bp drag at
end-2023 (Exhibit 6, right). This turnaround is the main reason that we expect core PCE
inflation to fall from the low 4s at end-2021 to the low 2s at end-2022.
7 November 2021 5
Exhibit 6: We Expect Moderate Price Level Normalization for Durable Goods Next Year, Pushing Supply-Constrained Categories from a
130bp Boost to Core PCE at End-2021 to a 55bp Drag at End-2022 and a 50bp Drag at End-2023
Deviation from Pre-Pandemic Price-Level Trend, Contributions to Year-on-Year Core PCE Inflation
Percent Percent Basis points Basis points
Supply-Constrained Categories from Supply-Constrained Categories
70 70 135 135
Share of
120 New Cars 120
end-21
Today Used Cars
60 deviation
60 105 105
that reverts GS Forecast for End-2021 90
Rental Cars
90
GS Forecast for End-2022 Video/Audio/Photo & Info. Equip.
75 Sports & Recreational Vehicles
75
50 GS Forecast for End-2023 50
60 Sporting Equipment 60
30% 45 45
Furniture
40 40 30 Housing Appliances 30
10%
15 15
30 40% 30 0 0
-15 -15
-30 -30
20 20
10% -45 -45
30%
30% 25% -60 -60
10 40% 10 -75 GS Forecast -75
-90 -90
May-18
Sep-18
May-19
Sep-19
May-20
Sep-20
May-21
Sep-21
May-22
Sep-22
May-23
Sep-23
Jan-18
Jan-19
Jan-20
Jan-21
Jan-22
Jan-23
0 0
Rental Used H.H. Video, Sporting Furniture New Sports
Cars Cars Applian. Audio, Goods Cars & Rec.
Etc. Vehicles

Paralleling this shift and overlapping with it a bit, the boost from higher commodity
prices to consumer price inflation is likely peaking now and should decline by roughly
½pp over the course of 2022 (Exhibit 7). While our strategists expect commodity price
levels to remain high and rise somewhat further on average next year, the rate of
change is likely to decline sharply, resulting in a more modest impact on the rate of
change of consumer prices.
Exhibit 7: The Boost to Consumer Price Inflation from the Commodities Boom Should Also Moderate in 2022
Percentage points Estimated Impact of Commodity Prices Percentage points

1.00 on YoY Core PCE Inflation 1.00
Lumber
37d8825a338041d9af856c7eea795cd9
0.75 Agriculture / Livestock 0.75
Precious Metal
Industrial Metal
0.50 Energy 0.50
Total, Assuming
Unchanged Prices
0.25 0.25
Total, Assuming GS
Commodity Forecasts
0.00 0.00
-0.25 -0.25
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2020 2021 2022
Source: Goldman Sachs Global Investment Research
7 November 2021 6
Wage Growth Stabilizes at a Strong but Sustainable Pace

The second key question for the inflation outlook is whether hot wage growth fueled by
labor shortages will cool down now that enhanced unemployment benefits have
expired. The early evidence from comparing early-expiration and late-expiration states is
mixed, but coming months should provide clues.
Our composition-adjusted wage tracker rose 4% over the last year, above last cycle’s
3% peak but still consistent with unit labor costs and prices growing at roughly 2% after
netting out productivity growth. Over the last two quarters, however, with labor
demand surging and enhanced unemployment benefits still in place, some wage
measures accelerated to a 5-6% annualized pace (Exhibit 8, left), which is likely
incompatible with 2% inflation. Wage growth at the low end of the pay scale has been
even stronger. Our low-wage wage tracker—which covers the bottom half of the wage
distribution—has risen nearly 7% over the last year, and wages for the lowest-paid
workers are up nearly 13% (Exhibit 8, right).
Exhibit 8: Wage Growth Accelerated in Q2 and Q3, Especially for Low-Wage Workers
Percent change, year ago Percent change, annual rate Percent change, year ago Percent change, year ago
7 GS Wage Tracker (composition-adjusted), YoY (left) 7 14 Average Hourly Earnings, Leisure & Hospitality 14
GS Wage Tracker (composition-adjusted)*, QoQ AR (right) Production & Nonsupervisory (composition-adjusted)
6 Wage Survey Leading Indicator (left) 6 12 GS Low-Wage Wage Tracker 12
5 5 10 10
4 4 8 8
3 3 6 6
2 2 4 4
1 1 2 2
0 0 0 0
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022
37d8825a338041d9af856c7eea795cd9
* Based on quarterly data for only average hourly earnings and the -2 -2
employment cost index. 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022
Source: Department of Labor, Goldman Sachs Global Investment Research
Labor shortages appear to have eased somewhat now that enhanced unemployment
benefits have expired, and the exhaustion of pent-up savings, the reopening of schools,
and reduced health risks should bring more workers back over time. But we expect
many of the roughly 1mn early retirees and some of the 2mn younger workers who
have left the labor force to remain out (Exhibit 9, left). After all, surveys indicate that
while some workers have not been looking for a job because they have unemployment
benefits or a financial cushion, others are out for non-economic reasons that might last
longer (Exhibit 9, right). This means that the labor market will remain even tighter than
implied by the unemployment rate, which we expect to return to its pre-pandemic
50-year low of 3.5% next year.
7 November 2021 7
Exhibit 9: Lower Labor Force Participation, Partly for Non-Economic Reasons, Will Keep the Labor Market Tight
Millions Millions Percent Reasons Cited by Unemployed Workers Percent
8 Total Drag on Labor Force, Relative to Trend 8 35 for Not Urgently Searching for a Job, 35
UI Benefits Greater Than Normal Wages Indeed Hiring Lab Job Search Survey
June
7 Self-Employment 7 30 30
July
Immigration
August
6 Other Labor Force Exits 6 September
Early Retirees 25 25
October
5 GS Forecast 5
20 20
Diagonal lines
4 indicate offsetting 4
effects on labor 15 15
3 demand* 3
10 10
2 2
1 1 5 5
0 0 0 0
Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Care COVID fears Spouse Financial Unemp.
responsibilities employed cushion benefits
2021 2022
Source: Department of Labor, Census Bureau, Indeed, Goldman Sachs Global Investment Research
Diminished labor supply coupled with very strong labor demand means that the ratio of
unemployed workers to job openings is likely to remain historically low, a recipe for
strong wage growth (Exhibit 10, left). Our wage Phillips curve model, which accounts
for both labor market slack and labor demand, projects that underlying wage growth will
average 4.0% in 2022 and 4¼% in 2023 and 2024 (Exhibit 10, right). This would be
meaningfully stronger than last cycle but softer than seen over the last two quarters and
still compatible with inflation eventually settling moderately above 2%. So far, our wage
survey leading indicator (Exhibit 8, left)—an aggregate measure of year-ahead wage
growth expectations among businesses and workers—looks consistent with our
forecast.
Exhibit 10: High Demand for Workers and Limited Supply Will Keep Wage Growth Just Above 4%, Stronger Than Last Cycle but Consistent
37d8825a338041d9af856c7eea795cd9
with the Fed’s 2% Inflation Goal
Ratio Unemployed Workers (U) vs. Job Vacancies (V) Ratio Percent change, year ago Wage Growth Percent change, year ago
7 7 10 10
U/V Ratio GS Wage Tracker*
GS Forecast 9 U/V Ratio Model 9
6 6 Forecast
8 8
5 5 7 7
4 4 6 6
5 5
3 3
4 4
2 2 3 3
2 2
1 1
1 1
0 0 0 0
1980 1985 1990 1995 2000 2005 2010 2015 2020 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025
Note: shading indicates NBER recessions. * Composition-adjusted wage tracker shown post-2000.
Note: shading indicates NBER recessions.
Source: Department of Labor, Goldman Sachs Global Investment Research
7 November 2021 8
Rents Surge in the Tightest Housing Market in Decades

The third key question for the inflation outlook is how hot shelter inflation will get in the
tightest national housing market since the 1970s. Vacancy rates for both
owner-occupied and rental units have fallen to extremely low levels (Exhibit 11, left), and
house prices have now risen 20% over the last year (Exhibit 11, right). We have long
argued that this national housing shortage is here to stay. Strong demand driven by
pandemic preference shifts, low mortgage rates, and demographic tailwinds looks
sustainable, and the constraints on supply—especially shortages of construction
workers and buildable plots of land—predate the pandemic and are likely to largely
persist.
Exhibit 11: The Tightest National Housing Market Since the 1970s Has Boosted House Prices by 20% Over the Last Year
Percent Percent Percent change, year ago Percent change, year ago
3.0 Homeowner Vacancy Rate (left) 12 25 Case-Shiller National Home Price Index Aug 21: 25
+19.8%
Rental Vacancy Rate (right)
11 20 20
2.5
10 15 15
9 10 10
2.0
8 5 5
1.5
7 0 0
6 -5 -5
1.0
5 -10 -10
0.5 4 -15 -15

1956 1963 1970 1977 1984 1991 1998 2005 2012 2019 1976 1981 1986 1991 1996 2001 2006 2011 2016 2021
Source: Census Bureau, Standard and Poor’s, Goldman Sachs Global Investment Research
Our shelter inflation model projects that the further labor market recovery we expect
combined with spillover effects from the ongoing boom in house prices will push shelter
37d8825a338041d9af856c7eea795cd9
above 4½% to the highest rate in three decades by end-2022 (Exhibit 12). Our shelter
inflation tracker—a leading indicator based on several alternative rent measures—has
already reached 5.3% year-on-year, suggesting that the risks around even our aggressive
forecast are two-sided. In 2023, we expect shelter to moderate to about 4%, still
somewhat higher than last cycle.
7 November 2021 9
Exhibit 12: We Expect Shelter Inflation to Rise at the Fastest Pace in 30 Years in 2022
Percent change, year ago Percent change, annual rate
6 GS Shelter Inflation Tracker* (left) 6
PCE Shelter Index, SA YoY (left)
5 PCE Shelter Index, MoM SAAR (right) 5
4 4
3 3
2 2
1 1
0 0
-1 -1
2005 2007 2009 2011 2013 2015 2017 2019 2021 2023
* Weighted Average of Four Alternative Rent Measures: Zillow Rent Index; Costar National Asking Rent; REIS Effective
Rent per Apartment; Census Vacant Multifamily Median Rent.
Note: Dashed lines denote GS forecast.
Source: Department of Commerce, Census Bureau, CoStar, Zillow, REIS, Goldman Sachs Global Investment Research
Faster growth of wages and rents should provide more persistent inflationary pressure
in coming years. Along with the moderate upward reanchoring of inflation expectations,
this should keep core inflation somewhat above 2%, higher than last cycle and in line
with the Fed’s goal under its new framework.
Inflation in 2022: Getting Worse Before It Gets Better

We complete the inflation outlook for next year by highlighting other category-level
trends that inform our bottom-up inflation forecast (Exhibit 13).
On the goods side, increased auto production should start to put some downward
pressure on prices by 2022H2, with more following in 2023. Appliance prices will rise
further in coming months due to inventory shortages and strong demand, but should
37d8825a338041d9af856c7eea795cd9
come down by end-2022 as production capacity and output expand and microchip
availability increases. Consumer electronics prices are likely to fall more materially as
peak work-from-home demand fades. Finally, pharmaceutical goods are likely to rise at
a trend-like pace in 2022 but then decline in 2023 following a spike in generic drug
launches.
On the services side, airfares should recover further due to higher oil prices and
rebounds in international tourism and business travel. Food services and
accommodations prices are likely to rise at an above-trend pace next year as demand
rises further and companies continue to pass through large increases in labor costs for
low-paid workers. Financial services inflation should rise in the near term, reflecting the
lagged impact of rising stock prices. Medical services should decelerate next year as
some pandemic-related government support payments sunset, but should reaccelerate
in 2023 as increases in personnel and supply costs pass through to higher insurer
reimbursement rates. Finally, our residual core services category should continue to
rise at an above-trend pace due to the importance of low-paid workers, whose wages
have risen quickly, in categories such as personal care and social services.
7 November 2021 10
Based on these assumptions, we expect core PCE inflation to rise further from 3.6% at
present to 4.4% at end-2021, but to then decline to 2.3% at end-2022 and 2.1% at
end-2023.
Exhibit 13: Our Bottom-Up Model Projects Core PCE Inflation of 2.3% at End-2022 and 2.1% at End-2021
2017-2019
Average Sept. 2021 End 2021 End 2022 End 2023
Contribution to Contribution to Contribution to
Weight YoY YoY YoY YoY YoY
Change Change Change
Core PCE 100.0 1.79 3.64 4.40 0.76 2.30 -1.34 2.10 -0.20
Core Goods 26.5 0.2 4.4 5.9 0.39 -1.3 -1.52 -2.0 -0.16
New Vehicles 2.1 -0.2 8.9 11.7 0.06 -1.5 -0.22 -2.4 -0.02
Used Vehicles 1.6 -1.1 27.7 43.1 0.24 -11.2 -0.61 -12.5 -0.01
Household Appliances 0.5 0.3 9.0 9.1 0.00 -5.6 -0.08 -5.4 0.00
Video, Audio, Computers 2.3 -6.0 1.6 1.4 0.00 -10.6 -0.28 -8.7 0.04
Recreational Vehicles 0.6 1.8 7.2 6.2 -0.01 -1.1 -0.05 -1.2 0.00
Jewelry, Watches 0.8 -0.8 7.0 8.8 0.01 -0.9 -0.06 -0.2 0.00
Clothing & Footwear 3.3 -1.1 2.8 3.4 0.02 2.0 -0.03 1.3 -0.02
Pharma & Medical 4.3 1.5 -1.6 -1.0 0.03 1.9 0.15 -1.5 -0.15
Pets Products 0.6 1.2 2.8 3.4 0.00 1.7 -0.01 1.3 0.00
Expenditures Abroad 0.1 4.4 3.4 3.3 0.00 4.2 0.00 3.0 0.00
Residual Core Goods 10.4 -0.6 3.0 3.9 0.09 -0.5 -0.35 -0.5 -0.01
Core Services 73.5 2.6 3.3 3.8 0.37 3.5 0.13 3.4 -0.05
Housing 17.2 3.3 2.8 3.4 0.11 4.6 0.31 4.0 -0.10
Ground Transportation 0.3 0.5 3.4 4.2 0.00 1.6 -0.01 2.3 0.00
Air Transportation 0.7 3.0 2.8 15.0 0.09 7.5 0.03 6.0 -0.01
Food Services & Accommodation 7.7 2.3 4.6 5.8 0.09 4.5 0.00 3.5 -0.08
Financial Services & Insurance 9.1 4.6 3.2 3.4 0.02 4.4 0.11 3.3 -0.11
Medical Services 18.6 1.8 2.6 2.8 0.03 1.9 -0.14 3.1 0.24
Foreign Travel 1.0 2.3 3.1 4.4 0.01 4.2 0.01 2.3 -0.03
Residual Core Services 18.7 2.0 4.2 4.4 0.04 3.2 -0.18 3.4 0.03
Mix Shift Impact (Across Categories) 0.00 0.05 0.01
Exhibit 14 summarizes our projected inflation path through 2022 and 2023. Further
increases in durable goods prices, strong wage growth, and accelerating rents keep
core PCE high on a sequential monthly basis through the coming winter and on a
37d8825a338041d9af856c7eea795cd9
year-on-year basis for much of next year. But the resolution of supply-demand
imbalances should turn a transitory inflationary boost from supply-constrained
categories into a transitory deflationary drag, bringing the sequential pace of core PCE
inflation close to 2% annualized around mid-2022 and driving the year-on-year rate down
to 2.3% by end-2022. That drag should persist in 2023 as durable goods prices
normalize further, and some moderation in shelter and low-paid labor dependent
services categories from very high inflation rates in 2022 should cause core PCE
inflation to fade further to 2.1% by end-2023.
7 November 2021 11
Exhibit 14: Core Inflation Falls as Supply-Constrained Categories Shift from a Transitory Inflationary Boost
to a Transitory Deflationary Drag
Basis points Contributions to Year-on-Year Core PCE Inflation Basis points

500 500
GS Forecast
Shelter
400 Other Services 400
Other Goods
Travel
300 Supply-Constrained Categories 300
Core PCE
200 200
100 100
0 0
-100 -100
Jul-18
Jul-19
Jul-23
Jul-20
Jul-21
Jul-22
Apr-18
Apr-22
Apr-23
Apr-19
Oct-19
Apr-20
Oct-20
Apr-21
Oct-18
Oct-21
Oct-22
Oct-23
Jan-18
Jan-19
Jan-20
Jan-21
Jan-22
Jan-23
Jan-24
There is still much uncertainty about the extent of price-level reversion in

supply-constrained categories and the outlook for wage growth. We therefore update
our scenario analysis to evaluate the risks around our 2022 inflation forecast (Exhibit 15).
Two main takeaways emerge. First, the evolution of supply-constrained categories is by
far the biggest contributor to inflation uncertainty in 2022. Second, the risks to our
forecast are probably tilted to the upside. Moderately more price level reversion in
durables categories coupled with slightly softer wage growth would subtract ¼pp from
our baseline forecast, but no price level reversion coupled with stronger wage growth
would add ½pp, and further increases in durables prices at half the rate so far in the
pandemic would add nearly 1pp.
37d8825a338041d9af856c7eea795cd9
Exhibit 15: Supply Chain Issues Create Substantial Inflation Uncertainty in 2022 and Tilt the Risks to the Upside
Wage Growth in 2022

3.50% 4.00% 4.50% 5.00%
Extent of price-level reversion in Contribution
supply-constrained categories (bps) Implied End-2022 Core PCE Inflation
Full reversion -165 1.05 1.20 1.35 1.50

More reversion -70 2.00 2.15 2.30 2.45
Baseline -55 2.15 2.30 2.45 2.60
Less reversion -40 2.30 2.45 2.60 2.75
No reversion -20 2.50 2.65 2.80 2.95
Supply constraints worsen further +35 3.05 3.20 3.35 3.50
* Number highlighted in red shows GS baseline forecast for end-2022 core PCE inflation.
7 November 2021 12
A Wider CPI-PCE Gap and a Hot Inflation Dashboard After Tapering

CPI inflation is likely to exceed PCE by more than usual next year, especially in the first
half, for three main reasons. First, durable goods have a higher weight in the CPI.
Second, shelter inflation also has a much larger weight in the CPI. Third, while the end
of pandemic-related support payments is likely to lower government-paid prices
included in the PCE health care index, the insurance component that is unique to the
CPI health care index is likely to spike over the next year (Exhibit 16).
Exhibit 16: Reversal of Government Support to Hospitals and Strong CPI Health Insurance Widen the CPI-PCE Gap
Percent change, year ago Percent change, year ago Percent change, month-on-month Basis points
4.0 4.0
4.0 80
Health Insurance CPI* (left); Contribution to Year-on-Year CPI-
3.5 3.5 PCE Gap (right)
3.0 60
3.0 3.0 Insurer Profitability**
2.5 2.5 2.0 40
2.0 2.0
1.0 20
1.5 1.5
PCE Healthcare Services Inflation 0.0 0
1.0 1.0
0.5 Pre-Corona Pace 0.5 -1.0 -20

Change in
0.0 0.0 Methodology
Jan-18 Jan-19 Jan-20 Jan-21 Jan-22 Jan-23 -2.0 -40
Sep-17
Sep-18
Sep-19
Sep-20
Sep-21
Sep-22
Mar-17
Mar-18
Mar-19
Mar-20
Mar-21
Mar-22
Note: Reflects GS estimates for of the impact of the CARES Act covid-treatment add-on
payments, the CARES Act Medicare sequestration reversal, the January 2021 physician
fee adjustment in the Phase 4 deal, and the January 2021 impact of permanent
administrative changes to physician visit codes. Assumes both the Medicare sequestration
reversal and the CY21 physician adjustment end in January 2022, based on current policy.
Assumes add-on payments are extended with pandemic "emergency period" through July *Adjusted to exclude the trend in hospital services and physician services prices.
2022. **Annual data on retention-benefit ratios, lagged 9 months. The latest data are incomplete.
Source: Department of Labor, Bureau of Economic Analysis, Goldman Sachs Global Investment Research
We expect these factors to push year-on-year core CPI inflation to the mid-5’s for much
of the winter, 4% next summer, and 3.2% at end-2022, a roughly 1pp gap with PCE on
average (Exhibit 17). The first and third contributing factors should reverse in 2023,
which would then compress the CPI-PCE gap.
37d8825a338041d9af856c7eea795cd9
Exhibit 17: Inflation Will Run Hot for Most of 2022, Making a Rate Hike Likely After Tapering
Percent change, year ago Percent change, year ago

7 7
6 Core CPI 6
Core PCE
5 Last Core CPI Before the July FOMC Meeting 5
Last Core PCE Before the July FOMC Meeting
4 4
3 3
2 2
GS Forecast
1 1
0 0
2017 2018 2019 2020 2021 2022 2023
Source: Department of Labor, Bureau of Economic Analysis, Goldman Sachs Global Investment Research
7 November 2021 13
The full set of inflation data will look quite hot on a year-on-year basis around the middle
of next year when tapering ends. Core PCE inflation is likely to remain above 3%, core
CPI inflation above 4%, and trimmed measures should rise as the shelter category
accelerates. This hotter inflation dashboard through the end of the taper process is the
main reason that we expect a seamless transition from tapering to rate hikes.
Spencer Hill
David Mericle
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7 November 2021 14
The US Economic and Financial Outlook

THE US ECONOMIC AND FINANCIAL OUTLOOK
(% change on previous period, annualized, except where noted)
2019 2020 2021 2022 2023 2024 2021 2022
(f) (f) (f) (f) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
OUTPUT AND SPENDING

Real GDP 2.3 -3.4 5.5 3.9 2.1 2.2 6.3 6.7 2.0 4.5 4.5 4.0 3.0 1.8
Real GDP (annual=Q4/Q4, quarterly=yoy) 2.6 -2.3 4.9 3.3 1.9 2.2 0.5 12.2 4.9 4.9 4.4 3.7 4.0 3.3
Consumer Expenditures 2.2 -3.8 7.9 3.4 2.1 2.2 11.4 12.0 1.6 3.3 3.5 3.0 2.0 2.0
Residential Fixed Investment -0.9 6.8 9.3 1.1 2.6 2.0 13.3 -11.7 -7.7 3.2 4.0 4.0 3.0 3.0
Business Fixed Investment 4.3 -5.3 7.5 4.6 3.6 3.8 12.9 9.2 1.8 4.2 6.1 4.4 4.0 3.4
Structures 2.1 -12.5 -8.0 -0.3 2.0 2.6 5.4 -3.0 -7.2 -2.4 2.0 2.0 2.0 2.0
Equipment 3.3 -8.3 13.1 4.8 2.8 2.8 14.1 12.2 -3.2 4.7 8.0 5.0 4.0 2.5
Intellectual Property Products 7.2 2.8 10.3 6.9 5.0 5.2 15.6 12.5 12.2 7.0 6.0 5.0 5.0 5.0
Federal Government 3.8 5.0 0.9 -1.7 -0.8 -0.1 11.3 -5.3 -4.7 -1.0 -1.0 -1.0 -1.0 -1.0
State & Local Government 1.3 0.9 0.6 2.6 1.6 1.0 -0.1 0.2 4.4 2.3 2.5 2.5 2.5 2.5
Net Exports ($bn, '12) -905 -943 -1,278 -1,376 -1,347 -1,316 -1226 -1245 -1312 -1328 -1348 -1377 -1388 -1393
Inventory Investment ($bn, '12) 75 -42 -85 150 105 60 -88 -169 -78 -5 80 150 190 180
Industrial Production, Mfg. -2.0 -6.6 6.4 5.1 2.2 1.8 2.8 4.9 5.3 5.6 5.9 5.1 3.7 2.4
HOUSING MARKET
Housing Starts (units, thous) 1,292 1,397 1,616 1,680 -- -- 1,599 1,588 1,566 1,711 1,693 1,667 1,637 1,723
New Home Sales (units, thous) 683 828 824 910 933 927 896 737 738 924 933 894 867 944
Existing Home Sales (units, thous) 5,327 5,658 6,070 6,159 6,247 6,324 6,303 5,833 6,057 6,087 6,117 6,146 6,175 6,200
Case-Shiller Home Prices (%yoy)* 3.4 9.9 15.4 9.8 7.5 5.9 11.7 15.9 15.3 15.4 13.3 11.3 10.5 9.8
INFLATION (% ch, yr/yr)

Consumer Price Index (CPI)** 2.3 1.3 6.4 2.9 2.6 2.4 1.9 4.8 5.3 6.2 6.2 5.1 4.2 3.2
Core CPI ** 2.2 1.6 5.2 3.3 2.6 2.5 1.4 3.7 4.1 4.8 5.7 4.7 4.2 3.6
Core PCE** † 1.6 1.5 4.40 2.30 2.10 2.20 1.7 3.4 3.6 4.3 4.3 3.4 2.9 2.4
LABOR MARKET
Unemployment Rate (%)^ 3.6 6.7 4.2 3.5 3.3 3.2 6.0 5.9 4.8 4.2 3.9 3.7 3.5 3.5
U6 Underemployment Rate (%)^ 6.8 11.7 7.7 6.7 6.3 6.1 10.7 9.7 8.5 7.7 7.2 7.0 6.8 6.7
Payrolls (thous, monthly rate) 168 -785 570 223 127 99 518 615 629 519 317 230 180 167
Employment-Population Ratio (%)^ 61.0 57.4 59.2 59.9 60.0 59.9 57.8 58.1 58.9 59.5 59.5 59.7 59.8 59.9
Labor Force Participation Rate (%)^ 63.3 61.5 61.9 62.1 62.0 61.9 61.5 61.6 61.6 61.9 61.9 62.0 62.0 62.1
GOVERNMENT FINANCE
Federal Budget (FY, $bn) -984 -3,129 -2,800 -1,200 -1,250 -1,300 -- -- -- -- -- -- -- --
FINANCIAL INDICATORS
FF Target Range (Bottom-Top, %)^ 1.5-1.75 0-0.25 0-0.25 0.5-0.75 1-1.25 1.5-1.75 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0.25-0.5 0.5-0.75
10-Year Treasury Note^ 1.92 0.93 1.60 1.80 2.30 2.50 1.74 1.45 1.52 1.60 1.60 1.60 1.60 1.80
Euro (€/$)^ 1.12 1.22 1.17 1.25 1.30 1.30 1.17 1.18 1.16 1.17 1.21 1.24 1.25 1.25
Yen ($/¥)^ 109 103 115 105 102 100 111 111 112 115 113 111 110 105
* Weighted average of metro-level HPIs for 381 metro cities where the weights are dollar values of housing stock reported in the American Community Survey. Annual numbers are Q4/Q4.
** Annual inflation numbers are December year-on-year values. Quarterly values are Q4/Q4.
† PCE = Personal consumption expenditures. ^ Denotes end of period.
Note: Published figures in bold.
Source: Goldman Sachs Global Investment Research.
37d8825a338041d9af856c7eea795cd9
7 November 2021 15
Economic Releases
Time Estimate
Date (ET) Indicator GS Consensus Last Report
Tue Nov 09 6:00 NFIB Small Business Optimism (October) n.a. 99.3 99.1
8:30 Producer Price Index, Final Demand (October) +0.7% +0.6% +0.5%
Ex Food and Energy +0.6% +0.5% +0.2%
Ex Food, Energy, and Trade +0.3% +0.2% +0.1%
Wed Nov 10 8:30 Consumer Price Index (October) +0.68% +0.5% +0.4%
Ex Food and Energy +0.42% +0.4% +0.2%
8:30 Initial Jobless Claims 250k 265k 269k
Continuing Claims n.a. n.a. 2,105k
10:00 Wholesale Inventories (September final) n.a. +1.1% +1.1%
Fri Nov 12 10:00 JOLTS Job Openings (September) n.a. n.a. 10,439k
10:00 UMich Consumer Sentiment (November preliminary) 72.2 72.4 71.7

37d8825a338041d9af856c7eea795cd9
7 November 2021 16
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2022 Inflation Outlook - Goldman Sachs - 071121

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2022 Inflation Outlook - Goldman Sachs - 071121

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7 November 2021 | 10:57PM EST

2022 Inﬂation Outlook: Getting Worse Before It Gets

2022 Inﬂation Outlook: Getting Worse Before It Gets Better

But we do not think that aggregate demand is on an unsustainable trajectory or that

Source: Bureau of Economic Analysis, Goldman Sachs Global Investment Research

A Long Road to Supply Chain Recovery

On the supply side, a variety of problems—Covid-driven factory shutdowns, disruptions

-10 -10 200 200

150 134 150

US Motor Vehicle Assemblies (left) 0 0

Unit Imports of Automotive Semiconductors from

As inventory is restored, the goods sector should transition from an environment of

Source: Bureau of Economic Analysis, Goldman Sachs Global Investment Research

Percentage points Estimated Impact of Commodity Prices Percentage points

Source: Goldman Sachs Global Investment Research

Wage Growth Stabilizes at a Strong but Sustainable Pace

Source: Department of Labor, Goldman Sachs Global Investment Research

Source: Department of Labor, Goldman Sachs Global Investment Research

Rents Surge in the Tightest Housing Market in Decades

0.5 4 -15 -15

Inﬂation in 2022: Getting Worse Before It Gets Better

Source: Bureau of Economic Analysis, Goldman Sachs Global Investment Research

Basis points Contributions to Year-on-Year Core PCE Inflation Basis points

Source: Bureau of Economic Analysis, Goldman Sachs Global Investment Research

There is still much uncertainty about the extent of price-level reversion in

Wage Growth in 2022

Full reversion -165 1.05 1.20 1.35 1.50

A Wider CPI-PCE Gap and a Hot Inﬂation Dashboard After Tapering

2.5 2.5 2.0 40

0.5 Pre-Corona Pace 0.5 -1.0 -20

Percent change, year ago Percent change, year ago

The US Economic and Financial Outlook

OUTPUT AND SPENDING

INFLATION (% ch, yr/yr)

Source: Goldman Sachs Global Investment Research

Source: Goldman Sachs Global Investment Research

Global product; distributing entities

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