Goldman Sachs: U.S. inflation is spreading from localized areas to broader sectors, but is far from repeating the 2022 crisis.

The risk of inflation spreading in the United States is becoming a reality, but its severity is far from crisis levels.

Goldman Sachs economist Jessica Rindels' latest research shows that measured by the Federal Reserve's preferred inflation gauge, Personal Consumption Expenditures (PCE), the current breadth of inflation is higher than the historical average from 1990 to 2019, especially under the weighted metric. This conclusion echoes the concerns of the new Fed Chair, Walsh, during last week’s Congressional hearing—Walsh specifically listed preventing "broad-based" price increases from spreading as a top priority.

However, Rindels' research provides an important reference: using a custom quantitative scale from 0 to 10 (0 corresponds to the 1990–2019 average, 10 to the 2022 inflation peak), the current breadth reading is 6 under the weighted metric and only 2 under the unweighted metric, both far below the extreme levels seen during the pandemic. The market reaction has been relatively calm, with S&P 500 futures rising about 22 basis points in pre-market trading Monday.

Quantitative Framework: How to Measure the Breadth of Inflation

Rindels uses a triple filter approach to build her analysis framework:

Using PCE as the base data, applying a six-month annualized rate to smooth short-term volatility, and calculating statistics both by component weight in PCE (weighted) and equally per category (unweighted).

Under this framework, the breadth of inflation is defined as the proportion of PCE components with price increases exceeding 3%. A weighted reading of 6 means that, calculated by consumption weight, the current breadth of inflation is about 60% of its 2022 peak; while the unweighted reading of 2 indicates that price increases remain relatively concentrated in a few categories and have not fully spread.

The significant difference between the two metrics suggests that current inflation pressures are mainly concentrated in higher-weight consumption categories rather than evenly distributed across various sub-sectors.

Price Increases Concentrated in Audiovisual, Financial, Medical, and Transportation

Rindels' research points out that the fastest-growing price increases are concentrated in video/audio services, financial services, medical services, and air tickets/transportation.

These categories have high weights in PCE and are the main contributors to the elevated weighted reading.

By contrast, although housing rent remains a key component of inflation, Rindels predicts its impact will gradually fade—expecting rent increases to fall below 3% in the fourth quarter of this year, which will significantly reduce its contribution to overall inflation breadth. This forecast offers some relief for market outlooks.

Market Pricing: Rate Cut Expectations Cool, Probability of September Rate Hike Rises Over 50%

Walsh's Congressional hearing last week was widely interpreted by the market as having a hawkish tone.

Afterwards, the yield on the US 2-year Treasury eased slightly from near 4.3% to 4.18% on Monday, indicating market adjustment following his remarks.

According to CME FedWatch data, traders currently expect an 85% probability that rates will remain unchanged at the July FOMC meeting, but the probability of a 25 basis point rate hike in September has risen to 52%. This means the market has incorporated an additional rate hike into its baseline scenario; the persistence of inflation breadth is reshaping expectations for Fed policy paths.

For investors, the core dilemma in the current situation is: while the breadth of inflation has exceeded historical norms, it has not yet triggered systemic risk; policy tightening expectations are rising, but the pace remains uncertain. Whether housing rent cools as expected will be a key variable to watch for inflation trends in the second half of the year.

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