The U.S. inflation turning point has arrived! Goldman Sachs: The pass-through of tariff costs is nearing its end, and core PCE inflation will return to the target level by the end of the year!

Goldman Sachs’ latest report indicates that U.S. core goods inflation is approaching a potential turning point. As the pass-through effect of tariffs to consumer prices diminishes, the overall downward trend in inflation is expected to continue near the target level by 2026.

According to Wind Trading Platform, based on Goldman Sachs’ February 25 monthly inflation monitoring report, the firm estimates that the pass-through of tariff costs to consumer prices has reached 62% after ten months of implementation. It forecasts core goods inflation will sharply slow from 1.97% year-over-year in December 2025 to 0.08% in December 2026. This trend suggests that the one-time inflation boost from tariffs is nearing its end.

Building on this, Goldman Sachs predicts core PCE inflation will fall to 2.2% by December 2026 and further decline to 2.0% by December 2027, aligning closely with the Federal Reserve’s target.

Meanwhile, last week the Supreme Court ruled 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 actual tariff rates in 2025. In response, Trump announced a “Global Tariffs” plan under Section 122, but Goldman Sachs believes this move has limited impact on actual tariff rates. These policy adjustments further support Goldman Sachs’ moderate inflation outlook and have slightly lowered market expectations for inflation in 2026.

Current Inflation Trends: High levels easing but still off target

Latest data shows inflation pressures are easing, but still remain above the Fed’s 2% target.

The core PCE price index rose to 3.00% YoY in December 2025 (a significant decline from the peak of 5.61%), and Goldman estimates that January’s YoY rate further edged up slightly to 3.05%. The core CPI fell to 2.51% in January from a peak of 6.62%, with a monthly increase of 0.30%.

Multiple trend indicators show inflation accelerated in December but is converging toward pre-pandemic levels. The Goldman Core Inflation Tracker registered 2.14% in December, and the GS Trimmed Core index was 2.24%, both notably below the official core PCE data, reflecting ongoing easing of inflationary pressures.

Pass-through of tariffs nearing completion: core goods inflation to fall sharply

Goldman Sachs’ core conclusion is that the pass-through effect of tariffs on goods prices has largely been exhausted, which will be a key driver in pushing inflation lower.

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

Notably, before tariff normalization, the gap between import prices and domestic prices widened to 6.8 percentage points from 3.7 percentage points (tracked via daily retail price indices by Cavallo and others), directly reflecting the scale of tariff pass-through. As this gap narrows, the downward space for goods inflation will open further.

Additionally, after the Supreme Court’s ruling to revoke IEEPA tariffs, Goldman estimates that core PCE inflation excluding tariff effects has recently fallen to about 2.3%, and is expected to further decline to 2.1% by the end of 2026. Including tariff effects, total core PCE inflation is projected to decrease to 2.2% in the same period.

Service sector inflation remains sticky, but housing pressures continue to ease

The relatively slow decline in core services inflation is one of the main factors constraining a rapid return to target levels.

Excluding housing, the core services PCE price index rose 0.33% month-over-month in December, with a 3.3% YoY increase; Goldman estimates January’s MoM increase at 0.39%, corresponding to a 3.44% YoY rate. While this is a significant slowdown from December 2024’s 4.1%, it remains above the roughly 2.5% level seen in the same period in 2018—when overall core PCE inflation was about 2%.

Housing inflation, measured by the growth in alternative new lease rents, continues to slow, with January YoY growth at just 0.2%, below December’s 0.5% and the 2025 annual average of 1.4% (based on data from Zillow, Yardi, CoStar, etc.). Goldman expects this trend to continue feeding into official CPI rent data, gradually reducing housing’s contribution to inflation in 2026.

Cooling labor market supports inflation decline

Wage and employment data also confirm a structural easing of inflation pressures.

Goldman’s Wage Tracker registered a YoY increase of +3.5% in Q4, and survey-based wage growth expectations for January fell further to +3.2%. The “jobs-workers gap” indicator in January dropped to -500,000, from a peak of +6 million in early 2022 and an average of +1.3 million in 2019. Ongoing labor market rebalancing will effectively curb the risk of a wage-price spiral.

Inflation expectations stabilize, market pricing adjusts downward

Recent surveys show marginal improvements in household and market inflation expectations, reinforcing confidence in a decline.

The University of Michigan’s February survey shows 1-year inflation expectations fell 0.6 percentage points to 3.4%; the New York Fed’s January survey indicates 1-year expectations declined 0.3 points to 3.1%, partially reversing the spike caused by tariff announcements. Medium- and long-term expectations remain stable, with Michigan’s 5-10 year at 3.3% and the NY Fed’s 5-year at 3.0%.

In financial markets, the implied 2026 CPI inflation from zero-coupon inflation swaps has decreased by 0.1 percentage points over the past month to 2.4%; expectations for 2027 and 2028 also declined slightly to 2.3%, indicating rising market confidence that inflation will approach the target.

Goldman Sachs forecast: Both indicators near 2% by end of 2026

Based on the above, Goldman Sachs’ baseline forecast indicates that U.S. inflation will substantially return to target by 2026.

Core PCE inflation is expected to fall from 3.0% in December 2025 to 2.2% in December 2026, reaching 2.0% in December 2027. Core CPI inflation is projected to decline from 2.5% in January to 2.1% in December 2026, and reach 2.0% in December 2027. Among components, core goods inflation will see the largest decline, housing inflation will ease modestly, and core services such as financial services will be the main drag on further declines.

For investors, these forecasts imply that if tariff pass-through effects fade as expected and service sector inflation continues to slow, the Federal Reserve’s policy space for easing in the second half of 2026 will further open.

This insightful analysis is from Wind Trading Platform.

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