JPMorgan says the 'Goldilocks' scenario is over, expecting a negative growth shock

JPMorgan economists said in a report sent to clients last Friday that they have officially ruled out the possibility of a "Goldilocks" scenario this year. The bank mainly attributed this judgment shift to the Iran conflict driving up energy prices, and accordingly, they have lowered the global economic growth forecast by about 25 basis points.

"Goldilocks" scenario refers to a situation where inflation continues to fall while the economy remains expansionary, which is the most ideal combination for the market. However, JPMorgan believes that the rise in oil prices is changing this path: the increase in energy prices may push the global core inflation rate above 3% — this was the bank's long-term prediction for global core inflation at the beginning of the year; at the same time, the rise in transportation and input costs will also push core commodity inflation above 2%, significantly higher than the Federal Reserve's long-term price target.

These inflation pressures will gradually be transmitted along the consumption and employment chain. The team led by JPMorgan's Chief Economist Bruce Kasman pointed out in the report:

"The risk that energy price shocks will squeeze household purchasing power and depress business confidence is significantly increasing, which increases the possibility that a negative growth shock will drive up unemployment rates.""

The path of inflation retreat has changed

Inflation will eventually retreat, but the path of retreat has changed significantly. JPMorgan believes that a substantial decrease in price growth is more likely to occur after demand weakens and growth shocks have already emerged, rather than before.

"The 'Goldilocks scenario' included in the central bank's forecasts for 2026 to 2027 is becoming increasingly unlikely. Any meaningful decrease in inflation is likely to be triggered by significant economic growth disappointments.

The latest U.S. inflation data has already shown increasing pressure. In April, the Consumer Price Index rose by 3.8% year-on-year, hitting a three-year high; gasoline prices reached $4.56 per gallon on Thursday, which is the highest level that U.S. consumers have paid in four years.

Three additional risks

JPMorgan also listed three risks of supply chain pressures, wage inflation, and rising short-term inflation expectations. The bank said that supply chain resilience is weaker than in previous years, and recent supply shocks and global trade tensions may drive up corporate input costs; the post-pandemic wage increases have only "partially receded."

"With global unemployment still below pre-pandemic levels, do not expect a robust growth environment to return wage inflation to a level consistent with 2% inflation."

Short-term inflation expectations are also on the rise. Data from the Cleveland Fed shows that the one-year-ahead one-year inflation expectation for May rose to 3.53%, an increase of 124 basis points from March. JPMorgan wrote in the report:

"Although this round of inflation surges may subside soon, its secondary impact on growth and core inflation may be significant."

Business Insider reported that other forecasters also warned that even if the U.S. reaches a peace agreement with Iran, inflationary pressures may persist for some time, partly because it may take several months for oil flows to return to normal after the Strait of Hormuz reopens. Morgan Stanley recently speculated that inflation may peak in May or June, citing ongoing price pressures such as tariffs and lagging housing inflation indicators.