Iran war could push inflation higher this year, Goldman Sachs says

• Brent crude is expected to average $105 in March and $115 in April before declining to $80 by Q4 2026, assuming six weeks of low oil shipments through the Strait of Hormuz; severe scenarios project peaks of $140-$160 per barrel
• Goldman Sachs raised its December 2026 PCE inflation forecast to 3.1% in the baseline scenario (up 0.2pp), with adverse scenarios reaching 3.6%-4% after spring peaks of 4.6%-4.9%
• The firm increased its 12-month recession probability by 5 percentage points to 30% and lowered 2026 GDP growth forecast to 2.1% Q4-over-Q4, while maintaining expectations for two Fed rate cuts in September and December

Summary

Key Analysis:

Goldman Sachs warns that the Iran conflict could significantly elevate U.S. inflation through 2026, complicating Federal Reserve monetary policy decisions on interest rate cuts.

Oil Price Projections:

• Baseline scenario: Brent crude averaging $105/barrel in March, $115 in April, falling to $80 by Q4 2026 (assumes 6-week disruption through Strait of Hormuz)
• Adverse scenario: Peak of $140/barrel, declining to $100 by Q4 2026 (10-week disruption)
• Severely adverse scenario: Peak of $160/barrel, settling at $115 by Q4 2026 (10-week disruption plus infrastructure damage)

Inflation Impact:

Goldman's rule of thumb: 10% oil price increase raises headline PCE inflation by 0.2 percentage points and core inflation by 0.04pp, primarily through transportation costs.

Revised Forecasts (Baseline Scenario):

• December 2026 PCE inflation: 3.1% (up 0.2pp from previous forecast)
• Core PCE inflation: 2.5% year-end
• Adverse scenario: PCE peaks at 4.6% in spring, settling at 3.6% by December
• Severely adverse: PCE peaks at 4.9%, ending at 4%

Additional inflationary pressures include fertilizer export constraints potentially boosting food prices by 1.5%, adding 0.1pp to headline inflation.

Economic Growth:

GDP growth downgraded to 2.1% Q4-over-Q4 in 2026 (2.4% full-year basis) under baseline scenario.

Fed Policy Implications:

Goldman maintains forecast of two 25-basis-point rate cuts (September, December) but raised probability of no cuts from 20% to 25%. Recession probability increased to 30% (up 5pp). Current PCE inflation stands at 2.8% headline, 3.1% core—both above Fed's 2% target.