Goldman Sachs: We can explain almost the entire US inflation overshoot by tariffs and the war in Iran
At a Glance
The desk views Goldman Sachs' recent commentary as critical to understanding the current inflation backdrop in the U.S., which they attribute primarily to tariffs and the war-induced energy shock from Iran. According to their analysis, stripping out these factors shows inflation at or near target levels. Per the full note, headline PCE without these shocks would be around 2.2%, indicating that central bank policy may need to reassess rate hikes. The Fed's inclination to respond aggressively, however, complicates the outlook with market pricing indicating a solid 86 basis points of tightening over the next twelve months.
Key Takeaways
- 01Goldman Sachs highlights that U.S. inflation overshoot largely stems from tariffs and the Iran energy shock.
- 02Removing these factors could reduce headline inflation estimates significantly, near the Fed's target.
- 03Market expectations have shifted towards more aggressive rate hikes, with rates priced above three hikes over the next year.
- 04Goldman's stance remains dovish relative to the consensus forecast on the tightening path.
Full Analysis
What the desk is arguing
Goldman Sachs attributes the bulk of the ongoing U.S. inflation issue to two main factors: tariffs and the energy situation in Iran. They argue that excluding these elements, inflation rate adjustments would bring both headline and core inflation significantly closer to the Federal Reserve's target rates, reflecting temporary disruptions rather than a systemic issue.
In their latest analysis, September's Personal Consumption Expenditures (PCE) readings revealed a headline inflation of 3.6% year-on-year and core inflation at 3.1%. Goldman estimates that the peak contributions from the Iran energy shock are around 1.5 percentage points on headline inflation, with tariffs contributing an additional 0.3-0.4 percentage points. This leads them to project a decline in inflation toward 2.1% by the end of 2027 if these factors dissipate as anticipated.
Where it sits in our coverage
Our current consensus target sits at 1.075, with a range between 1.04 and 1.12 for the Mar-26 forecast. Notable targets include: - jpmorgan: 1.10 - bofa: 1.04
This Goldman Sachs view diverges from the street consensus, particularly as bofa and deutschebank have recently adjusted their forecasts to include additional hikes in December and March. Goldman remains on the lower end with just two hikes forecasted, contrasting with the broader market, which expects more comprehensive tightening.
How other firms see it
Several firms align with Goldman Sachs' timeline of increased rate hikes, including bofa and deutschebank, both forecasting hikes in December and March as inflation pressures linger. Conversely, firms such as jpmorgan are positioning for a more aggressive tightening cycle, given the persistence of inflation indicators.
Key relationships to monitor include the behavior of the USD/Iranian Rial, particularly due to its intrinsic linkage to energy prices influenced by regional tensions, as well as the broader USD behavior amidst perceived Fed policy changes.
Market Implications
Traders should observe the evolving trajectory of U.S. inflation data and its impact on Fed policy, particularly with the CPI readings scheduled for early November. A sustained uptick in inflation metrics could further cement the case for accelerated rate hikes, potentially pushing market expectations even higher.
From the original
Goldman Sachs is out with a chart that says the US inflation problem is almost entirely two things: tariffs and the Iran energy shock. Take those out and inflation is basically at target. The latest hard data is ugly. September PCE was 3.6% y/y on headline and 3.1% on core, with
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