Goldman Sachs explains: Why it believes tariffs will bring a "one-time shock" and U.S. inflation will not repeat in 2022

On May 28, according to news from the Chasing Wind Trading Platform, Goldman Sachs stated in its latest research report that tariffs will push the core PCE inflation rate in the United States to rebound to 3.6% later this year, but this inflation shock is expected to be a "one-time" price increase rather than a sustained inflationary pressure.

Goldman Sachs Chief Economist Jan Hatzius and others stated in the report that the current threat is much smaller compared to the inflation surge of 2021-2022, mainly due to a significant easing of labor market tightness, a continuous decline in forward-looking wage indicators, and household consumption capacity no longer being maintained at a high level due to fiscal transfers.

Goldman Sachs also pointed out that as the effects of tariffs fade and inflation slows, the Federal Reserve will still lower interest rates, with the first rate cut expected in December of this year. This forecast is consistent with mid-May predictions.

Why U.S. Inflation Will Not Repeat 2022

Goldman Sachs expects that tariffs will raise consumer prices by about 2% over the next year and a half, causing the core PCE inflation rate to peak at 3.6% in December, an increase of about 1 percentage point from current levels. However, as the one-time price level increase effect fades from year-on-year calculations, the inflation rate will fall back in 2026. The report states:

Aside from tariff factors, other inflation data has actually performed relatively weakly. Goldman Sachs' monthly inflation monitoring shows that underlying inflation trend indicators continue to decline, and the alternative leading indicator for new tenant rents has only increased by 1.4% over the past year.

Goldman Sachs analysts believe that the current threat is much smaller compared to the inflation surge of 2021-2022, mainly due to a significant easing of labor market tightness, a continuous decline in forward-looking wage indicators, and household consumption capacity no longer being maintained at a high level due to fiscal transfers.

First, Goldman Sachs believes that the balance in the labor market alleviates the wage-price spiral risk.

The report states that the U.S. labor market was in a historically tight state in 2022, exacerbating the wage-price spiral risk, whereas the labor market is now in a more normal balanced state.

Goldman Sachs' wage survey leading indicator has further dropped to only 2.9%, a level that may be consistent with an inflation rate below target.

Then, Goldman Sachs states that consumer spending capacity is no longer abnormally abundant.

A few years ago, due to fiscal transfer payments during the pandemic, consumers had more disposable income than usual, but due to pandemic restrictions, the goods and services available for consumption were fewer than usual. This abnormal environment may have also fueled the spread of inflation.

Goldman Sachs noted that at that time, many companies were surprised to find that when they heard other companies were raising prices more significantly than usual and tried their own larger price increases, the impact on sales was less than expected.

In contrast, today, companies have no reason to expect consumers to respond to price increases as mildly as they did in the past.

Finally, Goldman Sachs states that weak economic growth suppresses the persistence of inflation.

Goldman Sachs expects that the U.S. economy will perform weakly this year, with GDP growth of only 1%, about half of the potential growth rate, and the unemployment rate will slightly rise to 4.5%. In this moderate economic performance environment, Goldman Sachs expresses skepticism about the persistence of high inflation.

Federal Reserve Rate Cuts Still Possible

Based on these analyses, Goldman Sachs believes that the Federal Reserve is still expected to implement the final policy normalization rate cuts after the effects of tariffs dissipate and inflation slows down. The research report predicts that the peak effects of tariffs will be reflected in the inflation reports from May to August, and it initially forecasts that the first rate cut will occur in December.

However, Goldman Sachs warns that if, contrary to expectations, tariffs against specific countries rise significantly, or if tariff disputes escalate and continue until 2026, it could lead to production disruptions, supply chain issues, and shortages, thereby prolonging high inflation