Global macroeconomic outlook, inflation and monetary policy: Goldman Sachs expects temporary inflation pressure and limited further global rate hikes

Overview

Goldman Sachs assesses how Middle East energy disruption, resilient activity and recent inflation data have shifted the near-term global policy outlook. It expects modest additional tightening in several major economies, but argues that underlying inflation should cool enough to make market-implied future policy paths too hawkish in many cases.

Core views

Goldman Sachs identifies three reasons the Fed turned more hawkish than it had expected: renewed Middle East escalation risk lifted crude and, especially, refined-product prices; US activity outperformed expectations, with Q3 real GDP tracking 3.3% and August nonfarm payrolls rising 162k; and August CPI and PPI data implied core PCE inflation of 0.27% for the month. These developments replaced its previous expectation of no Fed hikes this year. The report nevertheless expects the news flow to become less hawkish over coming months. Middle East oil exports have recovered to nearly 80% of prewar volumes despite partial Strait of Hormuz closure and Red Sea disruption, while China has curtailed imports since early August as prices rose. Goldman Sachs therefore projects Brent to decline gradually to $85/barrel by December. It cautions that refined-product prices may stay high because refining capacity is scarce, and that a renewed escalation destroying additional energy infrastructure remains a concern. For the US economy, Goldman Sachs views underlying GDP growth as near its 2.3% potential despite volatile quarterly data, consistent with a stable labor market. Growth is bifurcated: upper-income consumers and AI-exposed businesses benefiting from data-center buildout remain strong, while residential investment is contracting under weak demographics and high mortgage rates. The report also expects consumption to soften despite strong August retail sales because nominal wage growth is slow, gasoline prices are higher, and the tax-refund boost is fading. The institution estimates core PCE inflation slowed to a 2.5% annualized rate over the past three months, including likely revisions, despite August's sequential pickup. It attributes the slowing to fading tariff and energy pass-through, software and accessories price increases, and portfolio-management charges. With unit labor cost and housing-cost pressures described as benign, it forecasts further deceleration to 2.2% year-on-year by 2027Q4. Goldman Sachs expects the Fed to deliver another 25bp hike at the October 27-28 meeting after the FOMC raised rates by 25bp without dissents and 16 of 18 participants signaled at least one additional hike by year-end. Beyond October, it expects a stable funds rate as core PCE slows more rapidly than the Committee projects, followed by cuts toward its estimated neutral rate of 3.25-3.5% beginning in late 2027. Its probability-weighted Fed view remains below market pricing. Outside the US, Goldman Sachs raised its ECB and BoE forecasts but still expects only moderate tightening. It expects a third ECB hike to 2.75% in December because growth is resilient, headline inflation is set to rise again, and the neutral deposit rate appears positive in real terms; however, its 2027 ECB view remains below market pricing given favorable underlying inflation, including August core HICP of 2.4% year-on-year. For the UK, it expects a one-and-done 25bp hike to 4% in November, then three cuts from late 2027 toward a revised 3.25% neutral-rate estimate. The report is also below market pricing in Japan, Canada and Australia. It forecasts 50bp of Japanese hikes in January and July 2027 to 1.75%, and 50bp of Canadian hikes in 2027H2 to 2.75%. In Australia, it expects one 25bp hike to 4.6% later in September, with a risk of another 25bp in November, before 100bp of cuts to 3.6% in 2027-2028. The common rationale is less concern than the market about upside inflation risk: underlying inflation is near target in Japan and Canada, while Australia’s elevated inflation should decelerate toward the 2-3% target band in 2027 as growth remains muted and unemployment rises. China is described as more bifurcated than the US. Exports, industrial production and advanced technology output such as industrial robots are strong, but property-related indicators, auto production, smartphones and microcomputers are contracting. August nominal retail sales rose only 0.4% year-on-year; Goldman Sachs notes that smaller retailers drove the increase while large retailers recorded sizeable declines. It still expects robust exports despite rising global resistance to China's export-share gains, but cut its 2026 GDP forecast to 4.5% and argues that stronger domestic-demand support is needed to meet the goal of doubling income from 2020 to 2035. For equities, Goldman Sachs expects S&P 500 EPS to grow 36% in 2026 before slowing to 11% in 2027. It argues that current earnings are temporarily elevated by gains on private investment stakes, including AI-model companies, and by AI-investment-driven margin expansion among semiconductor and memory stocks. A sharper slowdown would require an outright decline in AI investment, which it considers unlikely before 2028 or later. Finally, Goldman Sachs attributes most of the rise in government-bond yields to repriced monetary-policy expectations and expects long yields to decline modestly if part of that repricing reverses. It expects rising term premia, fiscal challenges and AI-related borrowing—forecast at $420bn of issuance in 2027—to limit any bond rally absent a deeper slowdown. Its FX strategists expect major currencies to remain in narrow ranges but see scope for meaningful CNY appreciation. Commodity strategists see a narrow route to lower oil prices next year despite continuing shipping disruption, favor long 2027 oil-product positions as hedges, and remain bullish on gold because of continued central-bank buying.

Analysis framework

The report links recent energy-market disruption, activity data and inflation releases to central-bank decisions, then compares Goldman Sachs forecasts with market pricing. It evaluates each major economy through growth, labor-market and inflation conditions, and extends the macro outlook to equities, government bonds, currencies and commodities.

Methodology notes

• Industry AnalysisSupply-demand framework

  Global oil supply-demand balance

  The report assesses Middle East export recovery, shipping disruption and reduced Chinese imports to explain why Brent could fall even while refined-product prices stay elevated.

• Macroeconomics

  Inflation and monetary-policy transmission

  The report uses activity, labor, energy-price and core-inflation indicators to judge the likely extent and timing of central-bank tightening and later easing.

• OtherYield curve analysis

  Policy-rate repricing and term-premium effects on government bond yields

  The report separates the impact of revised policy expectations from slower-moving term-premium pressure associated with fiscal challenges and borrowing needs.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Government bonds

  Policy-rate repricing drove most of the yield increase; partial reversal could lower long-term yields modestly.

  Strengths

  Potential support from reversal of some monetary-policy repricing.

  Comparison

  The report's expected policy paths are generally below market pricing.

  Risks

  Rising term premia, fiscal challenges and AI-related borrowing could limit a rally absent a deeper slowdown.

• Oil products

  Refined-product prices are expected to remain elevated despite a projected decline in Brent.

  Strengths

  Goldman Sachs emphasizes long 2027 oil-product positions as hedges.

  Comparison

  Product prices face tighter conditions than crude because refining capacity is constrained.

  Risks

  Renewed Middle East escalation could damage additional energy infrastructure.

• S&P 500

  AI investment and private-investment gains are supporting earnings.

  Strengths

  EPS is projected to grow 36% in 2026.

  Weaknesses

  Earnings growth is expected to slow to 11% in 2027 as temporary tailwinds fade.

  Comparison

  The report argues earnings-bubble concerns are overblown, but companies are currently over-earning.

  Risks

  A sharper earnings slowdown could occur if AI investment declines outright.

• CNY

  Goldman Sachs sees room for significant appreciation despite generally tight expected ranges for major currencies.

  Comparison

  The CNY outlook is more constructive than the report's narrow-range view for most major currencies.

• Gold

  The commodity strategists remain bullish.

  Strengths

  Continued central-bank buying supports the view.

Key data

• US Q3 real GDP tracking3.3%Growth tracking estimate cited as stronger-than-expected activity news
• US August nonfarm payrolls162kIncrease cited as evidence of resilient activity
• Core PCE inflation2.5% annualizedGoldman Sachs estimate for the past three months, including likely revisions
• Core PCE forecast2.2% year-on-yearForecast for 2027Q4
• Brent forecast$85/barrelProjected gradual decline by December
• China 2026 GDP forecast4.5%Reduced forecast amid weak domestic demand
• S&P 500 EPS growth36% in 2026; 11% in 2027Expected deceleration as temporary AI-related earnings support fades
• AI-related borrowing issuance$420bnCredit-strategist expectation for 2027 issuance

Impact & implications

The report's central implication is that near-term inflation and policy risks have increased, but sustained broad-based inflation pressure is not its base case. Goldman Sachs therefore expects limited additional tightening and policy paths below market pricing in several economies, while highlighting differentiated effects across oil products, bonds, currencies, Chinese domestic demand and AI-linked earnings.

Risks

• A renewed Middle East escalation could destroy more energy infrastructure and sustain higher energy prices.
• Refined-product prices may remain elevated because of constrained refining capacity.
• S&P 500 earnings growth could slow more sharply if AI investment declines outright.
• Rising term premia, fiscal challenges and AI-related borrowing may limit any government-bond rally.

What to watch

• Middle East oil-export recovery, shipping disruptions and China’s oil-import response.
• US core PCE, wage growth, household consumption and housing activity.
• The FOMC’s October 27-28 meeting and subsequent policy projections.
• Underlying inflation trends in the euro area, UK, Japan, Canada and Australia.
• Chinese domestic demand, property-related activity and export growth.
• The durability of AI investment and its contribution to S&P 500 earnings.