The turning point of inflation in the United States has arrived! Goldman Sachs: The cost of tariffs is nearing the end of being passed on, and core PCE inflation will return to target levels by the end of the year!

Goldman Sachs' latest report indicates that core goods inflation in the United States is approaching a potential turning point, as the transmission effect of tariff costs to consumers is gradually diminishing, and the overall downward trend in inflation is expected to continue towards target levels by 2026.

According to news from the Wind Trading Desk, Goldman Sachs estimated in its monthly inflation monitoring report released on February 25 that the transmission ratio of tariff costs to consumer prices has reached 62% after ten months of implementation, and it expects core goods inflation to significantly slow from a year-on-year rate of 1.97% in December 2025 to 0.08% in December 2026. This trend suggests that the one-time upward effect of tariffs on inflation is nearing its end.

On this basis, Goldman Sachs predicts that core PCE inflation will drop to 2.2% by December 2026 and further decline to 2.0% by December 2027, aligning closely with the Federal Reserve's target level.

Meanwhile, the Supreme Court ruled last week to overturn tariffs imposed under the International Emergency Economic Powers Act (IEEPA), which accounted for about 7 percentage points of the 10 percentage point increase in the actual tariff rate in 2025. In response, Trump announced a "global tariff" plan under Clause 122, but Goldman Sachs believes that this measure will have a relatively limited impact on the actual tariff rate. The aforementioned policy adjustments further support Goldman Sachs' moderate outlook on inflation, leading financial markets to slightly lower their implied expectations for inflation in 2026.

Current Inflation Trend: High but Slowing, Still Diverging from Target

From the latest data, inflationary pressures have eased somewhat, but there is still a distance from the Federal Reserve's 2% target.

The core PCE price index rose to 3.00% year-on-year in December 2025 (significantly down from a peak of 5.61%), and Goldman Sachs estimates that it further increased slightly to 3.05% year-on-year in January. For core CPI, it fell to 2.51% year-on-year in January, a significant decrease from the historical peak of 6.62%, with a month-on-month growth of 0.30%.

Multiple trend indicators show that inflation accelerated in December, but overall it has converged towards pre-pandemic averages. Goldman Sachs' core inflation tracking indicator (GS Core Inflation Tracker) recorded a reading of 2.14% in December, while the GS Trimmed Core Index was at 2.24%, both significantly lower than the official core PCE data, reflecting the continued easing of endogenous inflationary pressures.

Tariff Transmission Nearing Its End: Core Goods Inflation to Drop Significantly

Goldman Sachs' core conclusion is that the transmission effect of tariffs on commodity prices has largely been fully released, which will be a key driving force for pushing inflation down.

The report estimates that tariffs currently contribute approximately 0.7 percentage points to year-on-year core PCE inflation, but the incremental contribution by the end of 2026 will only be 0.1 percentage points. Based on this, Goldman Sachs expects core goods PCE inflation to plummet from 1.97% in December 2025 to 0.08% in December 2026—close to zero growth.

It is noteworthy that before the normalization of the tariff environment, the deviation between import prices and domestic prices has widened to 6.8 percentage points compared to 3.7 percentage points (according to the daily price index tracked by Cavallo et al.), visually reflecting the scale of tariff transmission As this price gap narrows, the downward space for commodity inflation will also open up.

In addition, after the Supreme Court ruled to revoke the IEEPA tariffs, Goldman Sachs estimates that the core PCE inflation, excluding the effects of tariffs, has recently fallen to about 2.3%, and is expected to further decline to 2.1% by the end of 2026. Including the effects of tariffs, the overall core PCE inflation is expected to drop to 2.2% during the same period.

Service Sector Inflation Remains Sticky, but Housing Pressure Continues to Ease

The relatively slow decline in core service inflation is one of the main factors constraining the rapid return of overall inflation.

The core service PCE price index, excluding housing, rose by 0.33% month-on-month in December, with a year-on-year growth rate of 3.3%; Goldman Sachs estimates a month-on-month increase of 0.39% in January, corresponding to a year-on-year rate of 3.44%. Although this reading has significantly decreased from 4.1% in December 2024, it is still higher than the approximately 2.5% level in the same period of 2018—when the overall core PCE inflation was about 2%.

Regarding housing inflation, the growth rate of rents for alternative new leases is continuing to slow, with a year-on-year increase of only 0.2% in January, down from 0.5% in December and the annual average of 1.4% for 2025 (according to average data from sources such as Zillow, Yardi, and CoStar). Goldman Sachs expects this trend to continue to transmit to official CPI rental data, with the contribution of housing inflation gradually shrinking by 2026.

Cooling Labor Market Supports Downward Inflation

Wage and employment data also confirm the structural easing of inflationary pressures.

Goldman Sachs' wage tracking indicator (GS Wage Tracker) recorded a year-on-year increase of +3.5% in the fourth quarter, while the comprehensive wage growth expectations from corporate surveys further declined to +3.2% in January. Goldman Sachs' "jobs-workers gap" indicator fell to -500,000 in January, down from a peak of +6 million in early 2022, with an average level of about +1.3 million in 2019. The ongoing rebalancing of the labor market will effectively curb the risk of a wage-price spiral.

Inflation Expectations Stabilizing, Market Pricing Adjusted

Recent inflation expectations among residents and the market have shown marginal improvement, helping to strengthen the credibility of the inflation decline.

According to a University of Michigan survey, one-year inflation expectations fell by 0.6 percentage points month-on-month in February to 3.4%; in a New York Fed survey, one-year expectations decreased by 0.3 percentage points in January to 3.1%, partially reversing the jump in expectations caused by the announcement of tariffs. In terms of medium- to long-term expectations, the University of Michigan's 5-10 year inflation expectations remain at 3.3%, while the New York Fed's 5-year expectations remain at 3.0%, overall remaining stable.

In the financial markets, the implied zero-coupon inflation swap rate for 2026 CPI inflation has decreased by 0.1 percentage points to 2.4% compared to a month ago; expectations for 2027 and 2028 have also been slightly adjusted downwards by about 0.1 percentage points to 2.3%, indicating an increase in market confidence regarding the inflation path trending towards the target.

Goldman Sachs Forecast: Both Indicators Approaching 2% by the End of 2026

According to the above analysis, Goldman Sachs' baseline forecast indicates that U.S. inflation will complete a substantial return by 2026.

Core PCE inflation is expected to decrease from 3.0% in December 2025 to 2.2% in December 2026, and reach 2.0% by December 2027. Core CPI inflation is expected to drop from 2.5% in January to 2.1% in December 2026, and touch 2.0% by December 2027. In terms of contributions, the decline in core goods inflation is the most significant, while housing inflation is also expected to moderate. Core service sub-items such as financial services will be the main source of downward pressure.

For investors, the above forecast implies that if the tariff pass-through effect dissipates as expected and service sector inflation continues to cool, the Federal Reserve's policy space for returning to an easing cycle in the second half of 2026 will further open up