Trump's Tariffs May Trigger An Inflation Shock - But Not A Lasting One, Goldman Sachs Says

A sharp rebound in inflation tied to Donald Trump's enacted trade tariffs could soon jolt markets, but Goldman Sachs believes this surge will be short-lived, driven by one-off price increases rather than deeper economic overheating.

In a Tuesday note, the bank's U.S. economist David Mericle said core personal consumption expenditures (PCE) inflation—the Federal Reserve's preferred gauge—will likely rise to 3.6% by the end of 2025.

That's a notable climb from April's reading of 2.8%, yet Goldman doesn't expect the jump to signal a return to the entrenched inflationary conditions of 2021-2022.

Why This Inflation Shock Is Different

Unlike the pandemic-era inflation, which was powered by demand surges, tight labor markets and massive fiscal transfers, the current shock stems from a one-time shift in relative prices due to tariffs.

"We expect tariffs to provide a one-time price level boost," Mericle said, forecasting a roughly 2% rise in consumer prices over 18 months.

Goldman estimates that that boost will push core PCE inflation higher by 1 percentage point before fading in 2026 as the base effect wears off.

Three factors support Goldman's benign outlook.

First, the bank expects sluggish growth. GDP is projected to expand just 1% in 2025—well below its potential—while the unemployment rate drifts higher to 4.5%.

Second, the labor market appears to be normalizing as wage growth indicators have continued to ease. Goldman's composite measure of wage expectations now stands at 2.9%, a pace consistent with inflation below the Fed's 2% target.

Third, consumer dynamics are fundamentally weaker than during the pandemic era. Unlike in 2022, when stimulus checks fueled strong spending, today's consumers are more cautious, limiting businesses' ability to pass on higher costs and discouraging aggressive price hikes.

What Could Go Wrong?

While Goldman remains optimistic, it flags potential risks. Inflation expectations, particularly those measured by the University of Michigan's survey, have climbed past their 2022 highs. Long-term inflation expectations have also edged to multi-decade highs, even before the tariff hikes fully affect consumer prices.

"These are valid concerns," Mericle wrote, though argued technical factors likely exaggerate the Michigan data. Broader market measures of inflation compensation have not shown similar spikes.

A more troubling scenario would unfold if Trump's trade policy escalates further.

"We would become more worried… if country-specific tariffs rise back to prohibitive rates," Mericle said, warning that sustained escalation into 2026 could spark supply chain disruptions, shortages and more durable inflation.

Fed Still On Track For Rate Cuts

Despite the tariff-induced inflation spike, Goldman remains confident the Federal Open Market Committee will resume rate cuts once the temporary price pressure fades.

The firm expects the peak tariff effects to show in inflation data between May and August, with the first rate cut likely in December—assuming inflation shows signs of retraction.

Interest rate traders are pricing in just one 25-basis-point rate cut by the end of the year, according to CME FedWatch data.

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