Goldman stands by call that consumers will bear the brunt of tariffs after Trump blasts bank's economist

Goldman Sachs economists, led by David Mericle, reaffirmed their forecast that U.S. consumers will bear approximately two-thirds of tariff costs by fall, potentially elevating Core PCE inflation to 3.2% by year-end, exceeding the Fed's 2% target. Despite President Trump's public criticism, Goldman stands by its research, asserting this impact is a one-time price level effect unlikely to deter the Federal Reserve from anticipated rate cuts, as the Fed's primary focus remains the labor market amid recent weak employment data.

Analysis

Goldman Sachs (GS) is publicly reaffirming a controversial economic forecast, projecting that U.S. consumers will bear approximately two-thirds of tariff costs by the fall, despite direct criticism from the President. This cost pass-through is expected to drive the core Personal Consumption Expenditures (PCE) price index to 3.2% by year-end, a significant increase from the 2.8% June level and well above the Federal Reserve's 2% target. The firm's economist, David Mericle, clarifies that this inflationary pressure is a 'one-time price level effect' that is unlikely to deter the Fed from its anticipated monetary easing. The central bank's focus is instead expected to be on the weakening labor market, underscored by a soft July nonfarm payrolls report and downward revisions to prior months. This creates a complex macroeconomic outlook where trade policy-induced inflation is running counter to a dovish monetary policy response, a view that aligns with market expectations for three additional rate cuts this year.

Key Decisions for Investors

• Given the forecast for rising inflation alongside expected Fed rate cuts, investors should assess portfolios for resilience in a potentially stagflationary environment where both consumer spending and corporate margins could be squeezed.
• Consider adjusting sector exposures by reducing weight in consumer discretionary stocks vulnerable to price hikes, while evaluating opportunities in domestic industries that may benefit from the pricing power afforded by tariffs.
• Pay close attention to upcoming labor market reports and Federal Reserve communications, as the analysis indicates these will be the dominant drivers of monetary policy, likely overriding concerns about the one-time inflationary impact of trade policy.