Goldman Sachs attributes nearly all US inflation overshoot to tariffs and Iran conflict

A chart from Goldman Sachs suggests that US inflation is driven almost entirely by two factors: tariffs and the energy shock stemming from Iran. Excluding those, inflation is roughly at target levels.

Recent data points to a challenging picture. The September PCE came in at 3.6% year-over-year for the headline figure and 3.1% for core, with gasoline and other energy goods surging 9.2% in that single month. Goldman estimates headline inflation is peaking just under 3.9% now, with core topping out near 3.3%.

Removing the two shocks changes the outlook significantly:

• Headline PCE excluding temporary factors: approximately 2.2%
• Core PCE excluding temporary factors: approximately 2.4%
• The energy/Iran component accounts for about 1.5 percentage points on headline at the peak
• Tariffs add another 0.3-0.4 percentage points on headline and earlier this year contributed nearly a full point on core
• Tariff impacts largely dissipate by mid-2027; the energy effect fades through late 2027
• By the end of 2027, headline is back near 2.1% and core near 2.4%

That is the argument for looking past the current data. Tariffs represent a one-time level adjustment, and oil does not typically climb 30% annually. Raising interest rates does not reopen the Strait of Hormuz.

The problem is that Goldman's own economists do not expect the Federal Reserve to look through it. Following a hot October CPI report — the third consecutive upside surprise — they added a rate hike to their forecast. They now anticipate 25 basis points in December and another 25 in March, pushing the first cut back to December 2027. A month ago, they were arguing the Fed might be one-and-done after September.

Other institutions are moving faster. Bank of America has just released a call for hikes in December, January and March, adding January to its forecast. Deutsche Bank has the same three. The market is pricing in 86 basis points of tightening over the next year, which equates to more than three hikes and exceeds any individual bank's forecast.

That puts Goldman in an unusual position. It views the overshoot as temporary, yet it remains the most dovish on Wall Street with two more hikes.

There are some flaws in the temporary narrative. For one, look at the red line on the core chart. It bottomed near 2.0% in mid-2026 and has since risen to about 2.4%. That is the underlying trend moving in the wrong direction, even after Goldman excludes everything it can. Second, core services excluding housing hit 3.6% year-over-year in September, tying for the hottest since 2024. Neither tariffs nor crude oil directly explains that.

Third, the word "temporary" carries a heavy burden. Tariff passthrough is now in its second year, and the energy wedge does not fully close until late 2027. That means nearly three years of above-target inflation coming after the 2021-23 period. Expectations do not care about the decomposition, and neither does a Fed that had two dissenters calling for a hike in October.

Goldman is likely correct on the math. But the Fed is hiking anyway, and the only remaining debate is how many times.

Also watch rates. The long end of the Treasury curve is starting to show renewed concern, with US 10-year yields up another 6 basis points to 5.16% today.