US core inflation may fall to 2.4% by 2027-end: Goldman Sachs’ Fed outlook explained

In its November 13 report titled “The Global Economy Is Forecast to Grow 2.8% in 2027 as Oil Prices Decline”, Goldman Sachs said core personal consumption expenditures (PCE) inflation could fall to 2.4% by December 2027, from an expected 3.2% at the end of 2026.

The forecast comes from Jan Hatzius, chief economist and head of Goldman Sachs Research. He expects the fading impact of US tariffs and lower energy prices to ease inflationary pressures over the next year.

The projection refers to core PCE inflation, which excludes food and energy prices. It is different from headline consumer price index (CPI) inflation. The Federal Reserve uses the PCE price index as its preferred measure when assessing inflation.

Why does Goldman Sachs expect US inflation to fall?

Goldman Sachs identifies two major factors that could bring down US inflation in 2027:

• Fading tariff impact: Price increases linked to tariffs are expected to become less significant in year-over-year inflation calculations from next spring.
• Lower energy prices: The bank expects the inflationary impact of the Iran war and related energy supply disruptions to ease.

When tariffs increase the cost of imported goods, businesses may pass some of the additional expense on to consumers. This can push up prices across different categories. However, once these increases enter the annual comparison period, their contribution to year-over-year inflation becomes smaller.

Goldman Sachs expects this effect to become more visible in 2027.

The bank also expects energy prices to decline as markets adjust to the supply shock caused by the Iran conflict. Its commodity strategists forecast Brent crude prices at $78 per barrel by the end of 2027.

Lower energy prices could support economic growth while easing inflation. However, the outlook depends on the conflict not escalating further and oil prices following the bank’s projected path.

Hatzius wrote, “We forecast a steady decline in year-over-year core inflation in the US and a more delayed decline in other major economies once the energy price shock is fully digested.”

Goldman Sachs expects Europe to face inflationary pressure for longer because higher energy costs could take more time to pass through to consumers.

What does the forecast mean for the Federal Reserve?

Despite expecting inflation to decline, Goldman Sachs does not anticipate immediate interest rate cuts. Instead, it expects the Federal Reserve to raise rates twice before easing monetary policy.

Its projected rate path is:

This means US borrowers and businesses may have to wait before benefiting from lower borrowing costs. The Fed could raise rates in the near term even as the inflation outlook improves.

The projections show the difference between falling inflation and monetary policy. Central banks also assess employment, economic growth and financial conditions before deciding whether to cut interest rates.

Goldman Sachs expects the US to have clearer temporary inflation drivers than several other major economies. However, it also sees greater exposure to a potential downturn in the artificial intelligence investment cycle.

The bank expects central banks in several major economies to tighten monetary policy in early 2027 before moving towards rate cuts later in the year. Weaker inflation data could allow some to begin easing sooner if economic growth also slows.

These are Goldman Sachs Research’s forecasts, not official Federal Reserve guidance. The central bank is not committed to following this projected rate path.

What could change inflation and interest rate outlook?

Goldman Sachs expects the global economy to grow by 2.8% in 2027, compared with 2.7% in 2026. It expects the US, Japan and the UK to grow faster than current consensus estimates.

Lower energy prices and continued investment in artificial intelligence could support this expansion.

The bank expects global nominal AI investment to rise to $1.8 trillion in 2027, from $1.1 trillion in 2026. It estimates that AI investment could add 0.4 percentage point to global GDP growth. 

In the US, it expects AI investment to contribute 0.6 percentage point to underlying GDP growth after accounting for the undercounting of semiconductor investment and chip-related intellectual property exports.

However, Goldman Sachs said risks to its global growth forecast were tilted to the downside. It identified several factors that could change the outlook:

• Iran conflict: A renewed escalation could push oil and other energy prices higher.
• Government borrowing: Large budget deficits could increase long-term borrowing costs.
• AI investment: Lower-than-expected spending could weaken economic growth. Capacity constraints, regulation, credit market stress and weaker demand could affect investment.
• Employment: Goldman Sachs sees early signs that AI adoption could weigh on the job market. It expects the employment impact to remain small in 2027 but become more significant in 2028 and 2029.

Disclaimer: This article is based on Goldman Sachs Research’s forecasts and projections. It is intended solely for general information and should not be considered financial, investment or policy advice. Actual inflation, energy prices and Federal Reserve interest rate decisions may differ depending on changing economic conditions and global developments. The forecasts discussed are not official guidance from the Federal Reserve and should not be treated as financial or investment advice. Financial Express Digital is not responsible for any decisions, actions or losses arising from the use of or reliance on the information presented in this article.