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Entrenched Inflation

There are all sorts of names now for today’s inflation. I still like the concept of “Persistently Elevated, Unactionable Inflation.” In its earnings report this morning, Goldman Sachs (GS) highlighted the prospect for “entrenched inflation.” Again, inflation peaking hardly matters if prices continue to increase at a high rate. In an environment where the Fed is scrambling to normalize monetary policy, entrenched inflation is analogous to unactionable inflation. From Goldman’s Q2 2022 earnings conference call (Source here):

“We see inflation deeply entrenched in the economy. And what’s unusual about this particular period is that both demand and supply are being affected by exogenous events, namely the pandemic and the war in Ukraine. And my dialogue with CEOs operating big global businesses, they tell me that they continue to see persistent inflation in their supply chains.”

Maybe

However, in a classic “on the other hand” moment, Goldman also noted that its economist predicts that “….inflation will move lower in the second half of the year.” So which is it? Goldman gave almost no clue from its plans or actions what it really believes about inflation. One potential exception comes from its plan to “reduce certain professional fees going forward.” Goldman referred to this fee cut in the context of improving operating efficiency.
 

Goldman Definitely Puts Employees On Notice

Operating efficiency is a great euphemism for tightening spending and constraining labor expenses. I took particular note that Goldman may reinstate its annual performance review. The company suspended this review during the pandemic. That gracious move likely took a lot of stress off an already pandemic-stressed workforce. Now, these looming performance reviews will motivate incrementally more productivity and provide a basis for trimming the workforce after year-end in parallel with a slowed “velocity” in hiring.
 

Conditions Could Improve

Despite an abiding caution, Goldman was quick to point out that conditions could improve.

“We’re being flexible and being prepared to be nimble in case the environment gets worse. By the way, we don’t know that the environment is going to get worse. The environment might get better, too.”

In the context of an inflationary economy, presumably “get better” aligns with the Goldman economist’s prediction of lower inflation pressures in the back half of the year. However, recession/stagflation is a potential side effect of the Fed’s apparent growing success in clamping down on inflation expectations. In other words, to get better, a rebound from recessionary pressures better move VERY fast.

(Click on image to enlarge)

Goldman Sachs Group, Inc (GS) gained 2.5% post-earnings but remains caught in a well-defined downtrend this year. Both the 20-day moving average (DMA) and the 50DMA have guided GS downward. (Source: TradingView.com)

Be careful out there!

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