Goldman Sachs CEO warns inflation may prove 'stickier' than expected

Goldman Sachs CEO David Solomon said Friday in his annual letter to shareholders that inflation may prove to be "stickier" than previously anticipated.

Goldman Sachs CEO David Solomon warned Friday that inflation may prove more difficult to conquer than previously expected after back-to-back reports showed that price pressures within the U.S. economy rebounded at the start of the year.

In his annual letter to shareholders, Solomon said he is optimistic about this year as his firm stands to benefit from a rebound in capital-markets activity, even though prices could remain abnormally high for some time.

"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," he wrote. "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."

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Prices for everything including groceries, new cars and health insurance surged in 2021 and 2022 as the result of rampant inflation, which was caused by COVID-19 pandemic-induced disruptions in the global supply chain, an extremely tight labor market and increased consumer demand fueled in part by stimulus cash. 

While inflation has fallen considerably from a peak of 9.1% notched during June 2022, it remains above the Federal Reserve's 2% goal. And when compared with January 2021, shortly before the inflation crisis began, prices are up a stunning 18.49%. 

WHY ARE GROCERIES STILL SO EXPENSIVE?

High inflation has created severe financial pressures for most U.S. households, which are forced to pay more for everyday necessities like food and rent. The burden is disproportionately borne by low-income Americans, whose already-stretched paychecks are heavily affected by price fluctuations.

But progress on inflation has largely flatlined since June, with the consumer price index hovering at or above 3% for the past nine months, stoking concerns on Wall Street over the possibility of "stagflation." Stagflation is the combination of economic stagnation and high inflation, characterized by soaring consumer prices as well as high unemployment.

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Solomon said that CEOs of multinational corporations have told him that economic conditions, particularly for lower-income consumers, have deteriorated, and they are seeing "behavioral changes" as a result. 

"But the Fed now has room to ease if economic conditions start to deteriorate," he said.

Solomon also called 2023 a "year of execution" for Goldman – which began with the bank laying off about 3,200 employees, one of the deepest rounds of job cuts ever for the company.

"We took swift, decisive action to refocus the firm’s strategy while at the same time strengthening our core businesses, and I’m proud of the progress we made," he said. "We put the firm in a stronger position for 2024 and beyond."