Goldman Sachs: US-Iran Conflict Inflation Shock Fading, Fed Expected to Hold Steady in 2026
Miles Bennett
Goldman Sachs economists David Mericle and Pierfrancesco Mei argued on July 12 that commodity prices have retreated sharply from wartime peaks, with the inflation pass-through set to fade markedly in Q3–Q4. The Fed is expected to hold rates steady through the rest of 2026 — but the margin for error is razor-thin, and oil back at $100 is the biggest tail risk.
How far have commodity prices fallen?
Oil remains roughly 30% below its late-April-to-early-May wartime peak. Retail gasoline is down 15% from its high, likely pulling June headline CPI lower.
Jet fuel has dropped 35%, which should weigh on airfares over the coming months.
Gulf-exported chemicals — methanol, polyethylene, nitrogen fertilizer — are back near pre-war levels. Only sulfur and ammonia remain elevated.
Shipping and air-freight costs are still rising, but international transport accounts for just 1%–2% of US consumer-goods import costs — and the current increase is far smaller than the 2021–2022 surge. This means → the freight-cost hit to consumer prices should be modest.
When does the inflation pass-through peak?
Goldman ran two verification tools: a commodity-to-consumer price pass-through model, and the Fed Board / NY Fed shortage index (a composite gauge of supply tightness) plus supply-chain pressure indicators.
Both point to the same conclusion: the incremental commodity-price impact on monthly core PCE inflation — personal consumption expenditures excluding food and energy — peaked in Q2. The May–June window marks the high point for the conflict's monthly inflation effect; Q3–Q4 will see a sharp decline.
Monthly core PCE gains are forecast at 24 basis points in June, then settling into a 20–23 bp range. Extra inflation pressure from tariff effects and over-estimated AI demand should also fade in the second half.
Could inflation expectations come unanchored?
Market-based inflation compensation measures — in plain terms = the price signals the bond market generates about "how high future inflation will be" — remain moderate. Fed Chair Waller recently underscored this point.
Consumer inflation-expectation surveys such as the University of Michigan's are running hot, but Goldman questions their reliability: survey responses have become increasingly politicized and less correlated with actual macro trends.
Goldman's composite persistent-inflation-risk indicator shows that, absent further escalation, the war's inflation shock is not severe or prolonged enough to trigger inflation contagion. The risk of expectations de-anchoring remains contained.
What will the Fed do?
Goldman's call: the inflation path described above is enough for the Fed to stand pat through the rest of 2026.
But the margin for error is extremely thin, and some degree of dissent within the FOMC — the Federal Open Market Committee, the Fed's core rate-setting body — is likely.
In plain terms = inflation is coming down, but not fast enough and with too little room to spare. The Fed has no case to hike — and no confidence to cut.
What is the biggest risk?
The entire call hinges on one premise: the conflict does not escalate sharply from here.
If oil returns to $100 a barrel, Goldman's model shows monthly core inflation would rise by an additional 3–4 basis points.
This means → the number itself looks small, but Goldman warns the real damage of a fresh supply shock lies beyond the arithmetic. It would deepen uncertainty about when the supply shock ends and reinforce fears that inflation expectations could ultimately de-anchor. This reflects a non-linear risk for the Fed: each further leg up in oil doesn't just add proportionally to the policy debate — it escalates it.
Content is for reference only, not financial advice.