Goldman Sachs Raises U.S. Inflation Outlook and Cuts 2026 Growth Forecast on Oil Shock

Revised U.S. Inflation and Growth Projections

Goldman Sachs now expects U.S. core PCE inflation to reach 3.5% by the end of 2026, up from its prior estimate of 3.0%. The bank attributes this revision to the pass-through effects of higher energy costs on consumer prices.

On growth, Goldman has cut its 2026 U.S. GDP forecast to 1.7% from 2.2%. The bank cites the drag from elevated oil prices on consumer spending and business investment as the main factor behind the weaker outlook.

Goldman characterises the impact of the Middle East conflict and the associated oil price spike as a stagflationary headwind for the U.S. economy. It warns that if the conflict persists through the summer, U.S. GDP growth could fall below 1.5% while inflation remains above 3%.

Oil Market Disruption and Monetary Policy Outlook

According to Goldman, the closure of the Strait of Hormuz has removed roughly 20% of global oil supply from the market. This disruption has pushed Brent crude prices close to $100 per barrel and West Texas Intermediate (WTI) above $94 per barrel.

In response to the changed macroeconomic environment, the bank has adjusted its Federal Reserve policy outlook. Goldman now expects the Fed to keep interest rates on hold at its May and June meetings, with the first rate cut postponed to September 2026 instead of June. It is described as the first major Wall Street brokerage to shift its rate cut call to September. The bank’s baseline assumes no further escalation of the conflict.

Goldman notes that the Iran war has become the dominant macro risk for 2026 in Wall Street forecasts, overtaking earlier concerns about tariffs and trade policy.

Dollar Strength and Global Financial Conditions

Goldman Sachs reports that the U.S. dollar has strengthened significantly, with the DXY index rising to 99.54. This move has put pressure on emerging market currencies and contributed to tighter global financial conditions.

In major currency pairs, EUR/USD has fallen to 1.153 and GBP/USD to 1.337 as investors have sought safety in the dollar, according to the bank.

FAQ

What changes did Goldman Sachs make to its U.S. inflation forecast?
Goldman Sachs now expects core PCE inflation to be 3.5% by year-end 2026, up from its prior forecast of 3.0%, reflecting the impact of higher energy costs on consumer prices.

How did Goldman adjust its 2026 U.S. GDP growth outlook?
The bank lowered its 2026 U.S. GDP growth forecast to 1.7% from 2.2%, citing the drag from elevated oil prices on consumer spending and business investment.

When does Goldman now expect the Federal Reserve to begin cutting rates?
Goldman forecasts that the Federal Reserve will keep rates unchanged at its May and June meetings and deliver a first rate cut in September 2026, assuming no further escalation of the conflict.

What role does the Middle East conflict play in Goldman’s outlook?
Goldman links the ongoing Middle East conflict, and specifically the closure of the Strait of Hormuz, to a loss of about 20% of global oil supply, higher oil prices, and a resulting stagflationary headwind that shapes its revised inflation, growth, and policy forecasts.