Goldman Says Yellen Has No Need to Worry About Foreign Prices

Will the Fed Pause Rate Hikes in 2016?
  • Research found `little evidence' global inflation hurts U.S.
  • HSBC has said international inflation does have impact on U.S.

Federal Reserve Chair Janet Yellen doesn’t need to worry about the lack of foreign inflation in 2016 if Goldman Sachs Group Inc. economists are right.

While HSBC Holdings Plc recently warned overseas inflation will limit the Fed’s ability to raise interest rates next year, Goldman Sachs is arguing otherwise in predicting Yellen and colleagues will lift their benchmark four times.

“There is little evidence of a broader global deflationary force at work that extends beyond the impact of commodity-price declines and dollar appreciation,” David Mericle and Daan Struyven told clients in a report on Wednesday.

The Goldman Sachs duo estimated how much global inflation -- stripped of energy and food prices -- had an impact on each member of the Organization for Cooperation and Development. For the U.S., they found “no evidence” that international inflation has a statistically meaningful effect.

The result shouldn’t be a surprise given that 70 percent of the items in the U.S.’s core inflation basket are services that are largely immune to global pricing pressures, Mericle and Struyven said.

Although import prices can have an effect on inflation, that’s typically because of currency fluctuations rather than because of weakness elsewhere in the world, they said.

Moderate Acceleration

Such conclusions leave Goldman Sachs predicting a moderate acceleration in inflation in 2016 as the economy reaches full capacity.

HSBC sees just two rate increases, with Janet Henry, its chief global economist, recently writing that the gap between actual global growth and its potential rate will widen next year, dragging on U.S. inflation.

“Fed policy will continue to be steered by developments elsewhere,” Henry said in her report.

The Goldman Sachs economists question the use of the so-called output gap, saying it does not have a statistically robust effect.

Not all will escape the pull of foreign forces. Iceland, Israel, the Czech Republic and South Korea will all be affected by inflation elsewhere because trade accounts for a large share of their gross domestic product, Goldman Sachs said.

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