Synopsis:

Goldman Sachs expects tariff escalation in 2025 to slow the return of core PCE inflation to the Fed's 2% target, despite broader disinflationary trends from cooling wages, fading catch-up inflation, and normalizing shelter costs.

Key Points:

• Core PCE Inflation Trend:

  • Core PCE inflation, currently at 2.7% y/y, is projected to fall to 2.1% by December 2025, excluding tariff effects.
  • Without tariff escalation, inflation would be closer to the Fed’s 2% target.

• Disinflationary Drivers:

  • Catch-up inflation from pandemic-era input cost increases is fading, with many categories returning to pre-pandemic inflation levels.
  • Shelter inflation is expected to decelerate significantly, dropping from 4.7% y/y in December 2024 to 3.4% y/y by the end of 2025.
  • Cooling wage pressures and normalized inflation expectations further support disinflation.

• Tariff Impact:

  • Escalating tariffs are expected to add friction to disinflationary momentum by increasing consumer prices.
  • The delays in achieving the 2% target will stem from higher import costs and potential secondary inflationary effects.

Conclusion:

While structural disinflationary forces remain intact, Goldman Sachs highlights tariffs as a key risk that will delay the full normalization of core PCE inflation. The firm projects core inflation to end 2025 slightly above target, with tariffs being the primary impediment to achieving 2% on time.