US consumers will bear brunt of Trump's tariffs, say Goldman Sachs economists

Goldman Sachs economists project US consumers will ultimately bear 67% of Trump's tariff costs, a significant increase from the current 22%, driving core PCE inflation to an estimated 3.2% by December. This mounting inflationary pressure, compounded by domestic producers raising prices, is influencing the Federal Reserve's cautious 'wait-and-see' approach to interest rates, even as market odds for a September rate cut surge to over 85% amidst political pressure from President Trump, who is also moving to appoint a new, tariff-skeptic board member.

Analysis

A Goldman Sachs economic report indicates a significant impending shift in the burden of US tariffs from corporations to consumers. While consumers have so far absorbed only 22% of these costs, this share is projected to surge to 67%, implying a direct pass-through that will fuel inflationary pressures. The report forecasts core PCE, a key Federal Reserve inflation gauge, will accelerate to 3.2% year-over-year by December, a notable increase from the recent 2.8% reading, with the tariff impact being a primary driver. This dynamic creates a difficult policy dilemma for the Federal Reserve, which is maintaining a cautious "wait-and-see" stance amid rising inflation, even as market expectations, reflected by CME FedWatch data, price in an over 85% probability of a rate cut in September. This policy tension is further complicated by political pressure, including President Trump's call for rate cuts and his nomination of a sympathetic voice, Stephen Miran, to the Fed's board.

Key Decisions for Investors

• Investors should scrutinize consumer discretionary and retail sectors for signs of margin compression, as the forecast indicates tariff costs will increasingly be passed on to customers.
• Prepare for heightened market volatility around the September FOMC meeting due to the significant divergence between the Federal Reserve's cautious inflation-focused stance and the market's pricing of a near-certain rate cut.
• The upcoming July Consumer Price Index release is a critical data point that could validate inflation concerns and shift Fed policy expectations, warranting close attention for any portfolio adjustments.
• Factor in a higher political risk premium for assets sensitive to monetary policy, as presidential pressure and a new board nomination introduce an element of unpredictability to the Federal Reserve's future decisions.