This could be the key to reducing inflation 1:06
(CNN) --
Red-hot inflation in the United States may not cool down as much as many expected this year, Goldman Sachs warned in a new report.
"The inflation outlook worsened this winter, as we expected, and now questions how much it will improve this year," Goldman Sachs economists wrote in a report to clients late Sunday.
Faced with this uncertainty, Goldman Sachs raises its inflation forecasts.
He expects core PCE inflation, the Fed's preferred price measure, to slow to 3.7% by the end of this year.
This is a jump from Goldman's previous forecast of 3.1%, and nearly double the Fed's target of 2%.
Inflation: everything you need to know about this economic phenomenon
Goldman also now expects consumer prices, which rose 7.5% annualized in January, the highest in 40 years, to decline to 4.6% by the end of this year and 2.9% by the end of next.
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The Wall Street bank said it is "increasingly concerned" about two main risks to inflation: inflation expectations and a very strong labor market.
"The initial spike in inflation could have lasted long enough and peaked high enough to raise inflation expectations in a way that feeds back into wage and price setting," the report said.
And inflation forecasts could rise further from already "very high levels," Goldman added, if Russia's invasion of Ukraine causes energy prices to soar or supply chains to be disrupted.
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The "spiral" that Goldman Sachs now sees possible
Economists keep a close eye on inflation expectations because if businesses and consumers anticipate that prices will continue to rise, they will change their behavior and make it a self-fulfilling prophecy.
At the same time, the job market is booming, with Goldman Sachs pointing to the largest gap between available jobs and workers in postwar US history.
The combination of elevated inflation expectations and a robust labor market "threatens to trigger a moderate wage-price spiral," according to Goldman Sachs, somewhat reversing its earlier assessment that there is little risk of such a spiral.
Given the new inflation forecast, Goldman Sachs said there should be an "easy case" for continued interest rate hikes at the Fed's remaining seven meetings this year.
The bank also anticipates an additional rate hike for next year, bringing the total for 2023 to four.
Inflation