Goldman Sachs: We can explain almost the entire US inflation overshoot by tariffs and the war in Iran
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.
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.
How firms align with this view
Aligned with the desk view
Contrary positioning
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.
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.
Risks to this view
A significant reversal of inflation would be necessary to invalidate this dovish outlook, particularly a rapid decline in energy prices or a halt in tariff impacts. Additionally, any signal from the Fed indicating a shift to a more accommodative stance could dramatically alter current market pricing.
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 gasoline and other energy goods up 9.2% in the month alone. Goldman sees headline peaking just shy of 3.9% right about now and core topping out near 3.3%. Strip out the two shocks and the picture changes: Headline PCE ex-temporary drivers: roughly 2.2% Core PCE ex-temporary drivers: roughly 2.4% Energy/Iran is worth about 1.5 pp on headline at the peak Tariffs are worth another 0.3-0.4 pp on headline and were closer to a full point on core earlier this year Tariff effects are largely gone by mid-2027; the energy effect fades through late 2027 Headline is back near 2.1% and core near 2.4% by the end of 2027 That’s the case for looking through it.
Tariffs are a one-time level shift and oil doesn’t rise 30% every year. Hiking rates doesn’t reopen Hormuz. Here’s the catch: Goldman’s own economists don’t think the Fed will look through it.
After Tuesday’s hot October CPI, the third straight upside surprise, they added a hike to their forecast. They now see 25 bps in December and another 25 bps in March, and they pushed the first cut back to December 2027. A month ago they were arguing the Fed might be one-and-done after September.
The rest of the Street is moving faster. Bank of America is just out with a call for hikes in December, January and March, adding January to its forecast. Deutsche Bank has the same three.
The market is pricing 86 bps of tightening over the year ahead, which is more than three hikes and more than any of them. So Goldman is in an odd spot. It says the overshoot is temporary, and it’s still the dove on the Street with two more hikes.
There are a few holes in the temporary story too. First, look at the red line on the core chart. It bottomed near 2.0% in mid-2026 and has climbed to about 2.4% since.
That’s the underlying trend moving the wrong way, even after Goldman takes out everything it can. Second, core services ex-housing hit 3.6% y/y in September, tied for the hottest since 2024. Neither tariffs nor crude explains that directly.
Third, “temporary” is carrying a heavy load. Tariff passthrough is in its second year and the energy wedge doesn’t fully close until late 2027. That’s nearly three years of above-target inflation on the heels of 2021-23.
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