This is via a Wall Street Journal interview with Goldman Sachs Chief Economist Jan Hatzius. Hatzius has, so far, stuck with his forecast for 3 interest rate cuts from the Federal Reserve in 2025, citing:

  • I think a lot of the underlying reasons for disinflation are still intact
  • for me, (its) hard to see how we're reversing this underlying inflation process
  • if you listen to Powell during the press conference, that seems to be where he's coming out as well. And I agree with that.

Summary of Inflation Impacts:

  • Hatzius foresees a manageable inflation environment, with continued progress toward the Federal Reserve’s 2% target.
  • While specific risks, such as tariffs, could cause temporary upticks in inflation, underlying economic adjustments (wages, labor market) support a disinflationary trend.
  • Sticky price components and seasonal effects will gradually align with overall disinflationary forces, reinforcing the downward trend in inflation

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More detail on his inflation outlook:

  • Current Outlook:

    • Hatzius expects core PCE (Personal Consumption Expenditures) inflation to be 2.4% by late 2025, down from the current 2.8%.
    • This revised forecast reflects a modest upward adjustment (from an earlier 2.1%) due to anticipated tariff impacts.

  • Impact of Tariffs:

    • Tariffs are projected to add around 30 basis points (0.3%) to inflation.
    • Hatzius aligns with the Federal Reserve’s similar adjustment during their recent FOMC meeting, which also factored in tariff-related inflation pressures.

  • Sticky Inflation Elements:

    • Some inflation components, such as auto insurance and other sectors with annual price adjustments, have contributed to higher backward-looking inflation.
    • Hatzius expects these effects to diminish over time, leading to less dramatic year-over-year price increases, particularly in early 2025.

  • Underlying Drivers of Disinflation:

    • Labor Market Rebalancing:
      • Wage growth is decelerating, which supports lower inflationary pressures.
      • The labor market is gradually adjusting, helping to reduce cost-push inflation.
    • Economic Trends:
      • Continued disinflation trends are supported by broader economic stabilization and slower price adjustments in previously high-inflation areas.

  • Seasonal Effects:

    • Hatzius highlights the potential for a smaller “January effect” in 2025, where price increases from December to January are less pronounced compared to previous years.
    • This will contribute to lower year-on-year inflation comparisons, improving the inflation outlook.

  • Confidence in Forecast:

    • Despite some volatility in inflation readings (e.g., higher numbers in September and October), Hatzius remains confident due to:
      • Improvements in underlying inflation drivers.
      • A favorable trajectory for wage growth and labor market conditions.
      • Indications from November data that inflation is already moderating.

From Friday's (20 December) data:

PCE core
PCE core yy