- Companies are raising prices in response to tariffs, fueling inflation concerns.
- Goldman Sachs believes tariffs will cause a one-time increase in inflation.
- The bank shares three reasons a tariff-induced inflation spike won’t be permanent.
As companies such as Walmart and Target consider raising prices due to President Donald Trump’s tariffs, Americans might be wondering if they’re in for another round of record-breaking inflation a la 2022, when price increases reached a 40-year high.
Goldman Sachs has some good news for inflation-weary consumers and investors: tariffs will only cause a temporary blip in inflation.
In a note published Monday, Goldman Sachs economists said they expect core PCE inflation to rise to 3.6% by the end of 2025. However, they believe the jump will reflect a one-time price level adjustment rather than the start of a new sustained inflation surge.
Goldman Sachs outlined three reasons why you shouldn’t expect a repeat of 2021-2022 levels of inflation from tariffs.
Primarily, the bank believes that tariff-induced inflation won't be as extreme as what consumers saw in 2022. David Mericle, the firm's chief US economist, said tariffs would only raise consumer prices by 2% over the next year and a half. The majority of the change in PCE will come from the direct impact of increased import prices and higher domestic production costs. The smaller magnitude of price increases should prevent inflation from becoming psychologically entrenched in setting prices and wages.
Secondly, the labor market has become more subdued in recent years. Back in 2022, a tight labor market led to a wage-price spiral as higher wages led to higher prices. It's harder to get a job now than it was in 2022, which means wage growth is cooling and no longer significantly driving inflation.
Goldman Sachs' wage survey leading indicator, which asks households and businesses about future wage growth expectations, has dropped from above 4% in 2022 to 2.9% now.
Consumers also have less cash on hand to spend, meaning that demand is subdued, further reducing the long-term impacts of inflation. During the pandemic, households had excess savings from stimulus measures, which gave companies more room to raise prices without taking a big hit to sales. Today, companies aren't at liberty to do so anymore, as household spending power has faded.
At the end of the day, a weak economy isn't good for GDP growth, but it creates a disinflationary drag. Goldman Sachs expects economic growth to be weak this year as GDP growth slows to just 1% and the unemployment rate ticks up to 4.5%.
"We are skeptical about the prospects for prolonged high inflation amidst mediocre economic performance," Mericle wrote.
The bank expects the bulk of the tariff inflation impacts to show up in the May through August inflation reports and slowly fade away afterward.