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Goldman Sachs has warned the Federal Reserve‘s efforts to tame soaring inflation mean that there’s a 35 per cent chance of a recession in the next two years.   

‘Taken at face value, these historical patterns suggest the Fed faces a hard path to a soft landing as it aims to close the jobs-worker gap,’ the investment bank’s chief economist Jan Hatzius told Bloomberg.

Fed chairman Jerome Powell’s indication that the reserve bank aims to raise interest rates eight times this year has Goldman jumping in on the dire warnings of an economic contraction, days after inflation jumped to a 41 year-high of 8.5 per cent. 

The reserve bank is seeking cut the cost of living for Americans while balancing slowing wage growth without increasing unemployment. And experts have warned that some of the price rises which have hit Americans’ hard in recent months could be here to stay. 

‘As per market expectations, a return to pre-Covid price levels seems unlikely — at least for most items in the consumer basket,’ financial analyst firm MSCI Research director Thomas Verkbraken told Axios.

Meanwhile, the cost of goods and services continue to climb. Amazon recently announced a 5 percent ‘surcharge’ for online sellers who use their shipping service to account for rising fuel costs, an increase that is guaranteed to end up costing consumers more. 

The consumer price index increased 8.5% in March from a year ago, a 41-year high

The consumer price index increased 8.5% in March from a year ago, a 41-year high

The consumer price index increased 8.5% in March from a year ago, a 41-year high

Shipping containers are seen near the Seagirt Marine Terminal, Port of Baltimore, Maryland in a file photo. Retailers will face pressure to jack up prices further as wholesale prices rise

Shipping containers are seen near the Seagirt Marine Terminal, Port of Baltimore, Maryland in a file photo. Retailers will face pressure to jack up prices further as wholesale prices rise

Shipping containers are seen near the Seagirt Marine Terminal, Port of Baltimore, Maryland in a file photo. Retailers will face pressure to jack up prices further as wholesale prices rise

Fed Chairman Jerome Powell lauded the uptick in worker pay over the last year, but said that it's running ahead of the 2 percent target of inflation, a troubling sign

Fed Chairman Jerome Powell lauded the uptick in worker pay over the last year, but said that it's running ahead of the 2 percent target of inflation, a troubling sign

Fed Chairman Jerome Powell lauded the uptick in worker pay over the last year, but said that it’s running ahead of the 2 percent target of inflation, a troubling sign

Wages have increased 5.6 percent since last year and unemployment dropped to 3.6 percent, slightly above pre-pandemic levels. 

‘The promise of wages moving up is a great thing,’ Powell said last month after raising interest rates. The rub is that the salary uptick is ‘running at levels that are well above what would be consistent with 2 percent inflation — our goal — over time.’

Historically, interest rate increases of the type that Powell is considering have resulted in recession. As Hazius points out, 11 out of 14 attempts to slow inflation have left the economy reeling.

 Goldman isn’t the only Wall Street bank to warn of a winter economy.

 Deutsche Bank analyst Matthew Luzzetti said that the increases in interest rates in order to slow inflation ‘ultimately tips the economy into recession by the end of next year.’ 

Gas prices have fallen off the record highs set last month, but remain well above historical averages

Gas prices have fallen off the record highs set last month, but remain well above historical averages

Gas prices have fallen off the record highs set last month, but remain well above historical averages

The U.S. Department of Agriculture predicted in their Food Price Outlook for 2022 the price of take-out and dine-in meals will go up as much as 6.5 percent by the end of the year. 

Before the pandemic, inflation held at the targeted 2 percent because of cheap labor, high productivity and technological advancements.

But supply chain snarls and worker shortages threaten to upend that.

The producer price index, which tracks inflation before it hits the consumer, spiked 11.2 percent in March, the same time last year, according to a Labor Department report last week.

The consumer price index, which gauges store prices, jumped 8.5 percent the biggest uptick in 41 years.

The jump marks the biggest 12-month uptick in wholesale prices since they were first tracked in 2010.

Inflation threatens to upend President Joe Biden’s agenda as workers struggle to make ends meet in the face of rising gas and food prices.

Employment levels are ticking back up with 431,000 jobs added in March and unemployment down to 3.6 percent.

The White House has blamed the rough economic road ahead on the Russian invasion of the Ukraine, which has further disrupted the fuel supply. 

 ‘We understand some realities happening right now, including the fact that there is a war happening in Europe,’ spokeswoman Jen Psaki said during a recent briefing.

But pollsters warn that the rising prices and looming downturn could spell disaster for the Democrats midterm election prospects.

‘I think what we’re missing right now is that voters are very much in ‘What have you done for me lately?’ They always are,’ President Biden’s pollster John Anzalone told Politico. ‘And they don’t feel Democrats can get their s*** together and get things done.’ 

It is the largest 12-month increase in wholesale prices since annual rates were first calculated in 2010, adding to pressure on President Joe Biden

It is the largest 12-month increase in wholesale prices since annual rates were first calculated in 2010, adding to pressure on President Joe Biden

It is the largest 12-month increase in wholesale prices since annual rates were first calculated in 2010, adding to pressure on President Joe Biden

The producer price index - which tracks inflation before it hits consumers - jumped 1.4 percent in March from the prior month and 11.2 percent from a year ago

The producer price index - which tracks inflation before it hits consumers - jumped 1.4 percent in March from the prior month and 11.2 percent from a year ago

The producer price index – which tracks inflation before it hits consumers – jumped 1.4 percent in March from the prior month and 11.2 percent from a year ago

The cost of fresh vegetables rose 81.5 percent from a year ago, grain prices jumped 40.1 percent and processed chicken increased by about a third.  

 There is some bright spots on the horizon, Hatzius said.

Other countries with large economies have managed control inflation and equalize labor pressures.

Group 10 countries, which includes Canada, the U.K., France, German, Sweden, Switzerland, Belgium and Japan have managed to raise interest rates without going into recession.

The chances of an economic retraction in the next 12 months stands at about 15 percent. 

 Economists recently have seen increasing odds of a U.S. recession, with 27.5% expecting a contraction in a Bloomberg survey in the first week of April, up from 20% a month earlier. They expect the consumer price index to average 5.7% in the final three months of the year, up from the previous 4.5% estimate.

Source: DailyMail

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