Tariffs to Temporarily Boost Inflation by 2%: Goldman Sachs

As major retailers like Walmart and Target consider raising prices due to the tariff policies implemented by Donald Trump, consumers and investors are wondering if they will face another round of record-high inflation similar to the 40-year peak experienced in 2022.

Goldman Sachs has brought some reassuring news for those affected by inflation: tariffs will only cause a temporary fluctuation in inflation rates. In a report released on Monday, Goldman Sachs economists predicted that the core Personal Consumption Expenditures (PCE) inflation rate will rise to 3.6% by the end of 2025. However, they believe this increase will reflect a one-time adjustment in price levels rather than the beginning of a new cycle of sustained inflation.

Goldman Sachs provided three reasons why tariffs are unlikely to cause a repeat of the inflation levels seen in 2021-2022. Firstly, they argue that tariff-induced inflation will not be as extreme as what consumers experienced in 2022. The company's chief U.S. economist, David Mericle, stated that over the next year and a half, tariffs will only cause consumer prices to rise by 2%. Most of the changes in personal consumption expenditures will come from direct impacts of rising import prices and increased domestic production costs. The smaller price increases should prevent inflation from becoming entrenched in price and wage settings.

Secondly, the labor market has become more subdued in recent years. In 2022, a tight labor market led to a wage-price spiral, as higher wages drove up prices. Currently, finding a job in the U.S. is more challenging than it was in 2022, indicating that wage growth is cooling and no longer significantly driving inflation.

Additionally, consumers have less disposable income, which means demand is constrained, further reducing the long-term impact of inflation. During the COVID-19 pandemic, U.S. households had excess savings due to stimulus measures, allowing businesses to raise prices without significantly impacting sales. Now, as household consumption power weakens, businesses can no longer do so freely.

Lastly, a sluggish economy is not conducive to GDP growth and drags down inflation. Goldman Sachs predicts that economic growth will be weak this year, with GDP growth slowing to just 1% and the unemployment rate rising slightly to 4.5%. Mericle wrote, "We are skeptical about the prospect of long-term high inflation amid the lackluster performance of the U.S. economy."

Goldman Sachs expects that the majority of the impact from tariff-induced inflation will be seen in the inflation reports from May to August and will gradually subside thereafter.