'Goldilocks leaves the stage': JPMorgan warns of a negative shock to the economy

JPMorgan Chase, Wall Street's largest bank, has removed the so-called "Goldilocks scenario" from its baseline forecast - an ideal forecast for the markets in which lower inflation is accompanied by stable economic growth. The reason for the revision was the war in the Middle East: a new jump in energy prices is likely to provoke a slowdown in economic growth, analysts believe.

Since the beginning of this year, JPMorgan has assumed that the growth of core inflation in the world will be about 3%, but now warns that rising energy costs could further accelerate the pace. The bank also cut its global growth forecast by a quarter percentage point - a surge in inflation would likely cause a negative shock to economic growth, analysts warned. Among the consequences of higher prices, JPMorgan cited possible higher interest rates, weaker retail demand and a worsening U.S. labor market, Business Insider (BI) reported.

Inflation, according to the bank's team of analysts, may slow only after consumer spending cuts hit the real economy. "'Goldilocks' scenario embedded in central bank forecasts for 2026-2027 looks increasingly unlikely, and any significant decline in inflation is likely to be the result of disappointment with the pace of economic growth," JPMorgan emphasized.

JPMorgan specifically pointed to supply chains that look less resilient than in past years due to recent disruptions and rising global trade tensions. The bank also warned of the risk of wage inflation: after a spike in inflation and labor shortages in the pandemic years, U.S. pay rose sharply and then only partially bounced back.Higher wages could lead to higher prices, the analysts warned, noting, "As long as global unemployment remains below pre-pandemic levels, sustained economic growth is unlikely to return (slow. - Oninvest) wage increases to a pace compatible with inflation of 2% (the US Federal Reserve's target. - Oninvest)," BI quoted a JPMorgan note as saying.

This week's key benchmark for Wall Street will be the U.S. Commerce Department's April report on U.S. personal income and spending (released on May 28). It includes the Fed's preferred inflation indicator, the PCE.

According to ING economist James Knightley, the performance of the index alone is unlikely to ease market concerns as long as the cost of trucking rises following the rising cost of automobile fuel, The Wall Street Journal reported.

The market is now almost completely convinced of a 25 basis point Fed rate hike by December, although a week ago the probability of such a move was estimated at about 70%, the business newspaper states.

This article was AI-translated and verified by a human editor