The turning point for US inflation has arrived! Goldman Sachs: The cost pass-through from tariffs is nearing its end, and core PCE inflation will return to target levels by the end of the year!
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Goldman Sachs’ latest report indicates that U.S. core goods inflation is approaching a potential turning point. As the pass-through effect of tariff costs to consumers gradually fades, the overall downward trend in inflation is expected to continue towards target levels within 2026.
According to Wind Trading Desk, based on Goldman Sachs’ monthly inflation monitor released on February 25, the bank estimates that the pass-through ratio of tariff costs to consumer prices reached 62% after ten months of implementation and projects that core goods inflation will significantly slow from a year-on-year 1.97% in December 2025 to 0.08% in December 2026. This trend suggests the one-off inflationary boost from tariffs is nearing its end.
On this basis, Goldman Sachs forecasts that core PCE inflation will fall to 2.2% by December 2026 and further decline to 2.0% by December 2027, essentially aligning with the Federal Reserve’s target level.
Meanwhile, the Supreme Court ruled last week to overturn tariffs imposed under the International Emergency Economic Powers Act (IEEPA)—accounting for 7 points out of the 10-point increase in the actual tariff rate for 2025. In response, Trump announced a “global tariff” plan based on Article 122, but Goldman Sachs believes this move will have a relatively limited impact on the actual tariff rate. These policy adjustments further support Goldman Sachs’ moderate outlook on inflation and have led to a slight downward revision in the market’s implied inflation expectations for 2026.
Current Inflation Trend: High but Moderating, Still Deviating from Target
According to the latest data, inflationary pressures have eased somewhat, but there is still a gap from the Fed’s 2% target.
The core PCE price index rose year-on-year to 3.00% in December 2025 (significantly down from the 5.61% peak), with Goldman Sachs estimating a slight further increase to 3.05% year-on-year in January. As for core CPI, the January year-on-year figure dropped to 2.51%, a sharp decline from the historical peak of 6.62%, with a month-on-month growth of 0.30%.
Several trend indicators show inflation accelerated somewhat in December, but overall converged towards pre-pandemic averages. Goldman Sachs’ Core Inflation Tracker reported a December reading of 2.14%, and the GS Trimmed Core Index was at 2.24%, both markedly lower than the official core PCE data, reflecting a continued easing of endogenous inflation pressures.
Tariff Pass-Through Nearing Its End: Core Goods Inflation to Drop Sharply
Goldman Sachs’ main argument is that the pass-through effect of tariffs on goods prices has essentially played out, which will be a key driver of falling inflation.
The report estimates that tariffs currently add about 0.7 percentage points to year-on-year core PCE inflation, but the incremental contribution will drop to just 0.1 percentage points by the end of 2026. Based on this, Goldman Sachs expects core goods PCE inflation to plunge from 1.97% in December 2025 to just 0.08% in December 2026—close to zero growth.
Notably, before tariff normalization, the price gap between imported and domestic goods has widened to 6.8 percentage points versus 3.7 percentage points (according to the daily retail price index tracked by Cavallo et al.), directly reflecting the scale of tariff pass-through. As this price spread narrows, the room for goods inflation to decline will open up accordingly.
After the Supreme Court’s decision to repeal the IEEPA tariffs, Goldman Sachs estimates that core PCE inflation excluding tariff effects recently dropped to around 2.3%, and is expected to fall further to 2.1% by the end of 2026. Including the tariff effect, overall core PCE inflation is projected to fall to 2.2% over the same period.
Sticky Service Inflation Remains, but Housing Pressure is Easing
The decline in core service inflation is relatively slow, making it one of the main constraints preventing a quicker overall inflation return.
Excluding housing, the core service PCE price index rose by 0.33% month-on-month in December, with a year-on-year growth rate of 3.3%; Goldman Sachs estimates a 0.39% month-on-month increase in January, corresponding to a year-on-year rate of 3.44%. Although this is a clear drop from 4.1% in December 2024, it remains above the roughly 2.5% level seen in 2018—when overall core PCE inflation was about 2%.
For housing inflation, growth in new lease rents continues to slow, posting just 0.2% year-on-year in January, below December’s 0.5% and the 2025 annual average of 1.4% (according to averages from Zillow, Yardi, CoStar, etc.). Goldman Sachs expects this trend to continue to feed through to official CPI rent data, gradually shrinking housing inflation's contribution in 2026.
Cooling Labor Market Supports Downward Inflation
Wage and employment data also confirm a structural easing in inflationary pressures.
Goldman Sachs’ Wage Tracker recorded a year-on-year growth of +3.5% in the fourth quarter, and composite wage growth expectations from employer surveys fell further to +3.2% in January. Goldman Sachs’ “jobs-workers gap” indicator dropped to -500,000 in January, compared to a peak of +6 million in early 2022 and an average of +1.3 million in 2019. The continued normalization of the labor market will effectively curb the risk of a wage-price spiral.
Inflation Expectations Stabilize, Market Pricing Down
Both consumer and market inflation expectations have recently shown marginal improvement, helping to reinforce the credibility of the inflation decline.
According to the University of Michigan survey, one-year inflation expectations fell by 0.6 percentage points month-on-month to 3.4% in February; in the New York Fed survey, one-year expectations dropped by 0.3 percentage points to 3.1% in January, with prior tariff-related expectation jumps partially reversed. In the medium and long term, the University of Michigan’s 5–10 year expectations remained at 3.3%, with the New York Fed’s 5-year expectations stable at 3.0%.
As for financial markets, 2026 CPI inflation expectations embedded in zero-coupon inflation swap rates have dropped by 0.1 percentage points to 2.4% from a month ago; expectations for 2027 and 2028 declined similarly by about 0.1 percentage points to 2.3%, indicating rising market confidence in inflation trending toward targets.
Goldman Sachs Forecast: Both Major Measures Approaching 2% by End-2026
Synthesizing the above analysis, Goldman Sachs’ baseline forecast shows U.S. inflation will substantially return to normal within 2026.
Core PCE inflation is expected to drop from 3.0% in December 2025 to 2.2% in December 2026, and reach 2.0% in December 2027. Core CPI inflation is projected to fall from 2.5% in January to 2.1% in December 2026, and hit 2.0% in December 2027. In terms of component contributions, core goods inflation will see the most significant decline, housing inflation will moderately trend down, and financial services and other service subsectors will be the main source of further downward drag.
For investors, these forecasts mean that if tariff pass-through effects fade as expected and service inflation continues to cool, the Fed’s policy space to return to a loosening cycle in the second half of 2026 will further open up.
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The above content was sourced from Wind Trading Desk.
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