Tariff-Driven Inflation Threatens Consumer Spending
Goldman Sachs has warned that the U.S. economy is entering a period of weakened growth, primarily driven by inflation stemming from new tariffs. The Wall Street firm expects GDP to grow at a modest 1.1% annual rate through 2025, citing reduced real income as a key headwind. The inflationary pressure, fueled by President Donald Trump’s tariff escalation, is expected to offset the benefits of recent looser financial conditions.
“Even a one-time price increase will eat into real income,” noted Jan Hatzius, Goldman’s chief economist. He highlighted that while recent retail sales appeared stable, broader consumer spending likely stagnated across the first half of the year—a rare trend outside of recessions.
Trump’s Tariffs Could Redefine the Economic Landscape
At the center of the forecast is the anticipated rise in reciprocal tariffs. Goldman projects an effective tariff rate of 15%, compared to an earlier estimate of 10%, with increases totaling 14 percentage points in 2025 and a further 3 points in 2026. These trade measures are expected to ripple across supply chains and domestic pricing, eroding household purchasing power and reshaping consumer behavior.
Goldman now anticipates that the personal consumption expenditures (PCE) price index—the Federal Reserve’s preferred inflation gauge—will rise to 3.3% in 2025. It is forecast to decline gradually to 2.7% in 2026 and 2.4% by 2027, remaining elevated above the Fed’s long-term 2% target for several years.
Fed Policy Outlook Clouded by Tariff Uncertainty
With GDP contracting at a 0.5% annualized pace in Q1 and consumer spending up just 0.5%, the economy already shows signs of vulnerability. Goldman estimates the probability of a recession at 30%, roughly double the long-term average. Policymakers at the Federal Reserve are expected to remain cautious, watching closely for further fallout from the tariffs before adjusting interest rates.
Should tariffs prove more disruptive than currently projected, Goldman believes the Fed may have to respond with more aggressive rate cuts than anticipated. Employment and supply chain risks are top concerns if tariffs hit critical sectors.
Mixed Signals Amid Broad Economic Caution
Despite headwinds, some indicators remain resilient. Consumer sentiment, as tracked by the University of Michigan, has improved from earlier lows, recovering since the initial announcement of tariffs in early April. Inflation expectations have also settled back to previous levels, easing some concerns about runaway prices.
The Federal Reserve Bank of Atlanta’s GDPNow model, which provides real-time economic forecasting, currently projects a stronger 2.4% annual growth rate for the second quarter. However, Goldman remains skeptical that the economy can maintain momentum in the face of deepening trade friction and slowing global demand.
