Goldman says a boom in consumer spending would ‘increase the odds’ of the Fed cutting back support this year

Goldman says a boom in consumer spending would ‘increase the odds’ of the Fed cutting back support this year

Goldman Sachs has raised the prospect of a bigger-than-expected boom in consumer spending lifting inflation to 2.5% by the end of the year, which it said would "increase the odds" of the Fed cutting back its support for the economy sooner than anticipated.

However, Goldman thinks core PCE inflation will most likely peak at 2.4% in April before dipping to 2% by the end of the year, analysts led by Spencer Hill said in a note on Tuesday. The bank's central forecast is for the Fed to start tapering bond purchases in early 2022.

Yet, Goldman raised the possibility of "an even more dramatic surge in demand" than previously expected, if people who have been able to save during the pandemic rush out to spend their money, causing a "boom in travel and recreation."

In such a scenario, the analysts predicted that core personal consumption expenditures inflation would stay above 2% from April and rise as high as 2.5% in the final quarter of the year. Year-on-year core PCE inflation stood at 1.5% in January, while consumer price index inflation was 1.4%.

The analysts said this - along with an expected drop in unemployment to 4.5% - "would increase the odds of [the Fed]