MW Why Goldman Sachs says tariff price hikes won't trigger an inflation surge

By Steve Goldstein

Economists at Goldman Sachs say the Trump administration's tariff policy will lift prices but not trigger an inflation surge.

While that's good news, it's for a bad reason - the firm's expectation is that the economy is going to slow down.

But first to the tariff math - Goldman economist David Mericle says the core measure of the personal consumption expenditure price index will accelerate to 3.6% later this year, from 2.6% in March.

That will come from the direct impact of higher import prices as well as the higher domestic production costs, as well as from "producers opportunistically raising prices."

The question is whether that price increase will be temporary or long lasting.

There are reasons inflation could stay high: first there just was an inflation surge that has scarred consumers, and the other is that consumer expectations of prices have already increased even before tariffs have started to bite.

In response, Mericle does note that the University of Michigan's measure of consumer inflation expectations has increased more than than the Conference Board and the New York Fed's measures.

But more importantly, Mericle says the U.S. economy will slow down later in the year, growing just 1%, or about half of the American economy's potential.

"We are skeptical about the prospects for prolonged high inflation amidst mediocre economic performance," he says.

He says the coming inflation rebound won't be as extreme as the 2021-2022 surge. "This is reassuring because the risk of high inflation becoming psychologically entrenched and normalized in price and wage setting should be proportional to how high, broad, and prolonged of an inflation burst consumers, workers, and businesses experience," says Mericle.

Compared to 2022, the labor market isn't as tight, so there's less fuel for a wage-price feedback loop. Also, this time around consumers won't be able to turn to pandemic-era savings from fiscal transfers.

Mericle does allow that the tariff-driven inflation rebound could become more dangerous if country-specific tariff rates rise back to prohibitive rates or if tariff escalation continues into next year.

After the long weekend, the yield on the 2-year Treasury BX:TMUBMUSD02Ywas just below 4%.

-Steve Goldstein

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May 27, 2025 03:57 ET (07:57 GMT)

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