Goldman Sachs: Upside Risk To Traded Inflation

Goldman Sachs note that their "economists' inflation forecast revisions now have core CPI peaking at 3.6% y/y in June, finishing 2021 at 3.5%, and averaging 2.7% in 2022. While the front-end of the inflation curve is already largely priced for such a trajectory, the inflation outlook could have implications for traded inflation should it pass through to higher longer-run expectations. A VAR on historical data (and our economists' survey of literature) suggests there could be some pass-through in prolonged periods of elevated inflation."

• "We estimate an increase of 15bp or so in 10-Year CPI survey measures, though the fact that many market participants anticipate the high levels are transient could mean actual pass-through may not be as large. This creates upside risk to medium term inflation from current levels, and could potentially lead to a repricing in the direction of the pre-2015 regime, which would be partly driven by expectations, and partly by higher inflation risk premia."
• "Near-term, while we see some modest upside risk to our previous end-2021 10-Year breakeven projection, we don't necessarily think it would translate to nominal yields being much above our 1.9% nominal yield forecast. Over longer horizons however, upside risks to both real and inflation components translate to upside risks to our current yield forecasts at those horizons."