Although that’s fantastic news, the company expects the economy to slow down, therefore it’s for the wrong reason.
But first, the tariff math: according to Goldman analyst David Mericle, the personal consumption expenditure price index’s core measure will increase from 2.6% in March to 3.6% later this year.
This will be due to the direct effects of rising import prices, rising domestic production costs, and “producers opportunistically raising prices.”
Whether that price increase will be short-term or long-term is the question.
Inflation may continue to rise for two reasons: first, consumers were traumatized by the recent spike in inflation, and second, their expectations of prices had already risen before tariffs began to take effect.
Mericle responds by pointing out that the University of Michigan’s consumer inflation expectations indicator has risen more than those of the New York Fed and the Conference Board.
More significantly, though, Mericle predicts that the U.S. economy would slow down later in the year and only grow by 1%, or roughly half of its potential.
“We are skeptical about the prospects for prolonged high inflation amidst mediocre economic performance,” he states.
According to him, the upcoming inflation recovery won’t be as severe as the spike in 2021–2022. “This is reassuring because the risk of high inflation becoming psychologically entrenched and normalized in price and wage setting should be proportional to how high, broad, and prolonged of an inflation burst consumers, workers, and businesses experience,” states Mericle.
The labor market is less tight than it was in 2022, which means there is less fuel for a wage-price feedback cycle. Additionally, consumers won’t be able to use the fiscal transfer savings from the pandemic this time around.
Mericle acknowledges that if tariff escalation persists into the following year or if country-specific tariff rates return to prohibitive levels, the tariff-driven inflation comeback could become even more hazardous.
The yield on the 2-year Treasury BX:TMUBMUSD02Y was little less than 4% following the long weekend.
