As Trump berates Goldman, other economists agree that higher tariff inflation is coming

Wall Street economists broadly anticipate significant consumer inflation and a drag on GDP due to escalating tariffs, with effective rates now around 18%. Firms including Goldman Sachs and JPMorgan project 1-1.5% additional inflation, potentially pushing core measures to the low-to-mid 3% range, and nearly 1% off GDP as companies increasingly pass on costs. While many expect the Federal Reserve to still pursue rate cuts given a weakening labor market, the rise in 'sticky' inflation could introduce hesitation, impacting consumer spending and near-term economic growth.

Analysis

A strong consensus is forming among major Wall Street economists that significant tariff-induced inflation is imminent, directly contradicting the market's recent embrace of a benign CPI report. Despite political pressure on Goldman Sachs for its forecast, firms like JPMorgan Chase, UBS, and Pantheon Macroeconomics share the view, projecting that tariffs could add between 1% and 1.5% to inflation and subtract nearly 1% from GDP. This outlook is underpinned by the depletion of pre-tariff inventories, the expiration of the 'de minimis' tariff exception for goods under $800, and an effective tariff rate climbing from approximately 3% to 18%. Economists anticipate this will push the core inflation rate into the low-to-mid 3% range. While the prevailing expectation is that a deteriorating labor market will still compel the Federal Reserve to cut rates, the rise in 'sticky' price inflation, which hit a 3.8% three-month annualized rate according to the Cleveland Fed, introduces a critical element of uncertainty. This stickiness, particularly in services, could cause policymakers to hesitate, creating a stagflationary environment where slowing growth (projected at just 0.85% for H2) coincides with persistent price pressures, ultimately dampening consumer spending.

Key Decisions for Investors

• Investors should consider positioning for higher inflation, as a broad consensus of economists forecasts a significant pass-through of tariff costs to consumer prices, particularly in retail goods.
• Monitor Federal Reserve communications and 'sticky' inflation data closely, as any hesitation to cut rates due to persistent inflation, despite a weaker labor market, would diverge from current market expectations and could trigger volatility.
• Exercise caution with consumer discretionary and retail sector exposures, as these are most directly impacted by the expiration of tariff exceptions and companies' reduced ability to absorb rising costs.
• Given forecasts for slowing GDP growth alongside rising inflation, a defensive portfolio stance may be warranted, with a focus on sectors less sensitive to consumer spending and rising input costs.