Goldman Sachs predicts that tariffs will lead to higher prices for goods and increased overall inflation in the coming months. They expect core inflation to rise, despite a slowdown in the labor, housing, and automotive sectors. The bank estimates that the May Consumer Price Index (CPI) report will show a slight increase due to these tariffs, with core inflation rising by 0.05 percentage points to reach 0.25% month-on-month. By the end of the year, core inflation could hit 3.5%, up from 2.8% in April. Goods are likely to push inflation more than services, while hotel and flight prices are expected to stay stable.

US CPI Data Release

The US CPI data release was set for Wednesday, with core inflation projected to be just below 3% year-on-year. Other firms like BofA and Morgan Stanley also shared their forecasts for the May CPI report. The data was to be released at 8:30 AM US Eastern Time. To summarize, Goldman Sachs highlights that we can expect higher goods prices, driving inflation up—even as housing, cars, and job markets slow down. Core inflation, which excludes unstable items like food and energy, is anticipated to steadily rise this year. The bank believes the May CPI report will reflect a slight increase from tariffs—about 0.05 percentage points—bringing core inflation to 0.25% for the month. They foresee this climbing to 3.5% by the end of the year, a significant jump from April’s 2.8%. Notably, goods are expected to be the main driver of this increase, while prices for hotels and flights are likely to remain steady. This difference is crucial for understanding what influences inflation. Other firms, including BofA and Morgan Stanley, are also monitoring the CPI closely, which was expected to be released early Wednesday morning in New York.

Impact On Market And Strategy

Looking ahead, it’s wise to focus on goods-sensitive investments and contracts in the coming weeks. Prices in consumer goods, retail-connected areas, and even soft commodities may react faster than anticipated. If core inflation reaches the expected 3.5% annually, short-term rate expectations could change quickly. A 0.25% monthly rise would affect swaps pricing for upcoming FOMC decisions, leading to more frequent adjustments to assumptions about cuts or pauses. Since services inflation appears more stable for now, there’s potential to shift away from sectors closely tied to travel or hospitality in the short term. The speed of tariff impacts can cause certain prices to rise quicker than consumer demand would suggest. As a result, we might see increased volatility in the goods part of CPI readings and market responses. While Blankfein’s team does not predict runaway inflation, the trend is clear: upward pressure isn’t fully reflected in all market segments. This could surprise those who are leaning toward deflationary expectations for Q3. For us, this means reassessing risks related to rates that may be vulnerable to unexpected CPI increases. We should think about adjusting risk across short leg spreads, particularly as the July report approaches. If headline figures show renewed strength—even influenced by just a few categories—we might need to adapt more quickly than usual. We should also pay attention to when seasonal adjustments lose their impact. Especially during August and September, previous easing in supply issues may not stabilize goods inflation as strongly. Finally, assumptions about continuous declines in shelter or auto-related inflation seem increasingly optimistic. A rebound in these areas—especially if wage pressures from earlier quarters return—could disrupt market trends significantly. This creates opportunities for reaction trades, but also many pitfalls. Create your live VT Markets account and start trading now.

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