Goldman Sachs: Iran war raises upside risk to oil prices; U.S. inflation forecast up, growth forecast down, but still expects two rate cuts this year

Overview

This report is a Q&A-style update from the Goldman Sachs U.S. economics team on how the evolution of the Iran war affects U.S. economic forecasts. It focuses on oil prices, inflation, GDP, employment, and Fed policy. The central assumption is that there remains a risk that disruptions to exports from the Gulf region and oil flows through the Strait of Hormuz will persist longer than expected. Although the U.S. and Iran previously announced a two-week ceasefire, oil flows remain weak and no agreement has been reached in negotiations, so Goldman believes the upside risk to the oil-price path remains elevated.

Core views

Goldman Sachs believes the main channel through which the war affects the U.S. economy is the energy-price shock. On inflation, higher energy costs will clearly lift energy-sensitive categories such as airfares, while higher prices for non-energy Gulf goods exports will add a small additional push through food and restaurant prices. On growth, higher gasoline spending will erode real disposable income and weigh on demand for autos, discretionary goods, and services; the additional drag from tighter financial conditions is currently modest, and domestic energy investment is unlikely to provide an effective offset. On employment, discretionary-consumption-linked industries such as leisure and hospitality are more vulnerable to the shock, and unemployment is expected to rise. On policy, Goldman expects the Fed to remain on hold in the near term, but with unemployment rising and core inflation still showing only limited improvement, there remains a case for cuts in September and December.

Analysis framework

The report uses a scenario-analysis and macro-transmission framework, breaking the oil-price shock into inflation pass-through, real income and consumption, financial conditions, domestic energy investment, employment, and monetary-policy reactions. The oil path includes base, adverse, and severely adverse scenarios; the inflation analysis combines energy cost pass-through, non-energy goods prices, supply-chain disruptions, and survey data; the growth analysis compares consumption, financial conditions, and shale investment channels; and the policy analysis uses the labor market, wages, price diffusion, and inflation expectations to judge whether the Fed could shift toward hikes.

Methodology notes

• Macro scenario analysisBase, adverse, and severely adverse oil-price scenarios

  Estimate Brent crude prices and their macro impact under different assumptions for the reopening of the Strait of Hormuz and Middle East production losses.

  The base case assumes that oil-flow disruptions gradually normalize; if reopening is delayed and Middle East output remains impaired, Brent could rise to $100/bbl or $115/bbl in Q4 2026.

• Inflation pass-through modelCommodity price pass-through model

  Changes in energy and non-energy Gulf goods prices affect core PCE through airfares, food, restaurants, and import prices.

  Goldman estimates that the energy pass-through to core PCE is about 0.2 percentage point, while non-energy goods and other effects add about 0.1 percentage point.

• Growth decompositionThree-channel framework for oil-price shocks

  Oil-price shocks affect GDP through consumption, financial conditions, and domestic shale investment.

  The main negative effect in this shock comes from lower real income and weaker consumption; the drag from financial conditions is modest, and the energy-investment offset is limited.

• Monetary policy reaction functionComposite persistent-high-inflation risk indicator

  Assess whether the oil-price shock will trigger wage-price feedback, broader price pressures, and higher inflation expectations.

  The report argues that the labor market is not as tight as it was in 2022, wage growth is below the level consistent with 2% inflation, and the persistent-high-inflation risk indicator remains subdued, so the probability of hikes is low.

Asset mapping & comparison

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

• Brent crude oil

  Core shock variable

  Strengths

  Geopolitical conflict and disruptions in the Strait of Hormuz keep the supply-risk premium elevated, with upside tail risk.

  Weaknesses

  The base forecast still assumes a gradual recovery, and the futures curve reflects market expectations that prices will eventually ease.

  Comparison

  The base case for Q4 2026 is $80/bbl, while the adverse and severely adverse scenarios are $100/bbl and $115/bbl, respectively.

  Risks

  A failed ceasefire, further delays in reopening the Strait, and continued Middle East production losses could push prices higher.

• U.S. Treasuries and policy rates

  Affected by both inflation and employment

  Strengths

  Rising unemployment and only limited improvement in core inflation support the call for rate cuts this year.

  Weaknesses

  The oil-price shock lifts headline inflation, which may keep some FOMC members cautious about cuts.

  Comparison

  Goldman Sachs's probability-weighted Fed forecast is more dovish than market pricing.

  Risks

  If wage growth rises above 4%, price pressures broaden, or longer-term inflation expectations move up, the risk of hikes increases.

• U.S. discretionary consumer sectors

  Largely negative impact

  Strengths

  If the oil-price shock eases, pressure on real income could lessen.

  Weaknesses

  Higher gasoline spending squeezes demand for autos, discretionary goods, and services.

  Comparison

  In historical oil shocks, employment losses were more pronounced in discretionary consumer sectors such as leisure and hospitality.

  Risks

  If oil stays elevated, demand will weaken further and unemployment will rise.

• U.S. energy producers

  Potential beneficiaries, but with limited investment response

  Strengths

  Rising oil prices typically improve cash flow and investment incentives for energy firms.

  Weaknesses

  Companies remain cautious because of war uncertainty, price volatility, expectations of a flattening futures curve, and a 6-12 month production lag.

  Comparison

  Unlike in 2022, the current inventory of drilled-but-uncompleted wells is very small, limiting the scope for a rapid production increase.

  Risks

  If the 2027-2028 crude futures curve moves up materially, investment behavior could change.

Key data

• December 2026 headline PCE inflation forecast3.1%Raised by 1 percentage point from before the war; a high April reading could push the y/y rate to a baseline peak of 3.6%.
• December 2026 core PCE inflation forecast2.5%Raised by 0.3 percentage point from before the war; expected to stay in the 2.7%-3.1% range through November.
• Brent crude price in Q4 2026, adverse scenario$100/bblAssumes the ceasefire does not hold and the reopening of the Strait is delayed by another month.
• Brent crude price in Q4 2026, severely adverse scenario$115/bblAssumes a later reopening followed by persistent Middle East production losses of 2 million barrels per day.
• 2026 Q4/Q4 GDP growth forecast2.0%Cut by 0.5 percentage point from before the war; the full-year measure is 2.3%.
• Consumption growth forecast1.2%2026 Q4/Q4 basis, below the pre-war forecast of slightly above 2%.
• Change in financial conditions indexPeak tightening of 75 bp, current net tightening of 25 bpPressure on financial conditions has eased after the ceasefire, close to the limited impact seen during the recent war.
• Unemployment rate forecast4.6%Expected to rise from 4.3% in March to a later level this year.
• Fed rate-cut forecastTwo 25 bp cuts in September and DecemberGoldman Sachs's probability-weighted forecast is more dovish than market pricing.

Impact & implications

For investors, the report points to a stagflation-like but not runaway-inflation macro mix: the energy shock lifts near-term inflation and suppresses real consumption and employment, but it is still not enough to force the Fed back into hiking mode. Fixed-income markets may need to focus on the policy gap between Goldman and market pricing, while equities and credit should watch the pressure from oil prices on discretionary consumption, leisure and hospitality, aviation, and autos, as well as the risk of financial conditions tightening again. In commodities, the upside tail risk in Brent crude remains the key variable for the macro forecast.

Risks

• The ceasefire does not hold and the reopening of the Strait of Hormuz is delayed further, leaving the oil-price path above base case.
• Middle East production suffers a sustained loss of 2 million barrels per day, driving the severely adverse scenario.
• Pass-through from energy prices to core inflation is broader and more persistent than expected.
• Non-energy Gulf goods, fertilizers, food, and restaurant prices add extra inflation pressure.
• Supply-chain disruptions and delivery delays widen, creating a pandemic-like diffusion of unusual price increases.
• Wage growth re-accelerates and creates wage-price feedback, forcing the Fed to consider hikes.
• Financial conditions tighten again materially, adding extra drag on growth.

What to watch

• Progress in U.S.-Iran negotiations, the durability of the ceasefire, and the recovery in oil flows through the Strait of Hormuz.
• The path of Brent crude in Q2 and Q4 2026, especially shifts between the $80, $100, and $115/bbl scenarios.
• The near-term pass-through into U.S. retail gasoline prices, jet fuel prices, and airfares.
• Whether food, restaurant, and import prices show non-energy cost pass-through.
• Whether the price components in business surveys and supplier delivery times deteriorate meaningfully.
• U.S. consumer spending data, especially autos, discretionary goods, and services consumption.
• The financial conditions index, equity markets, rates, and the dollar.
• Unemployment, slower hiring, and employment changes in discretionary sectors such as leisure and hospitality.
• Wage growth, inflation expectations, and market inflation compensation for signs of persistent-high-inflation risk.
• FOMC speakers and changes in rate-cut pricing ahead of the September and December meetings.