Goldman says Iran war inflation shock fades 30%, Fed to hold steady

Goldman Sachs expects the Federal Reserve to hold interest rates steady through the rest of 2026, saying the Iran war's commodity price shock has largely reversed with crude oil about 30% below its wartime peak.

"The inflation pass-through from the conflict peaked in the second quarter and will materially fade in the second half," Goldman economists David Mericle and Pierfrancesco Mei wrote in a July 12 research note.

They forecast core PCE inflation rising 24 basis points month over month in June, then settling into a 20-to-23-bps range for the remainder of the year. Retail gasoline has fallen 15% from its April peak and jet fuel is down 35%, while methanol, polyethylene and nitrogen fertilizer prices have returned to pre-war levels, the note said. International shipping costs, which rose after the first tanker strikes in late June, account for only 1 percent to 2 percent of US consumer import costs — a fraction of the disruption seen during the 2021-to-2022 supply chain crisis.

The analysis lands as Fed Chairman Kevin Warsh prepares to testify before the House Financial Services Committee on Tuesday and the Senate Banking Committee on Wednesday — his first congressional appearance since taking office in late May. Markets will parse his remarks alongside June CPI data due Tuesday, with Goldman forecasting a softer-than-consensus 0.17 percent monthly core increase that would pull the annual rate to 2.8 percent from 2.9 percent.

The Fed has held its benchmark rate steady since December 2025, and the central bank's semi-annual monetary policy report to Congress last week flagged tariffs, the Iran conflict and the artificial intelligence buildout as sources of "stepped up" inflation this spring. Warsh said at the European Central Bank's Sintra forum last month that inflation expectations and risks have both declined, comments markets read as more dovish than the Fed's own report.

Goldman's analysis hinges on the assumption that the conflict does not escalate further. If oil prices return to $100 a barrel, the monthly core inflation contribution would rise by an additional 3 to 4 basis points, the economists said. More importantly, a renewed supply shock would intensify concerns about whether inflation expectations remain anchored — a risk that could dominate the monetary policy debate regardless of the direct numerical impact.

The last time the Fed faced a comparable commodity-driven inflation scare was during the 2022 Russia-Ukraine energy shock, when Brent crude surged above $120 a barrel and core PCE peaked at 5.4 percent year over year. The current situation is far milder: core PCE stood at roughly 4 percent in May, and the Fed's preferred measure is expected to fall toward 3.2 percent after the Bureau of Economic Analysis implements a methodology adjustment in August, Goldman said.

The benign inflation outlook supports bonds and eases near-term pressure on the dollar, though the extremely limited tolerance for error means any escalation in the conflict could rapidly shift the macro outlook. OIS markets currently price no change in the fed funds rate through year-end, consistent with Goldman's base case. The Federal Open Market Committee's June meeting showed an even divide between officials anticipating rate increases this year and those expecting the policy rate could stay steady or fall, the Fed's own projections revealed.

Goldman also flagged that tariff effects and AI-related demand overestimates — additional sources of inflation pressure flagged in the Fed's report — will fade in the second half. The bank's models, which use a shortage index and supply chain pressure indicators developed by Fed and New York Fed economists, show the conflict's broader economic disruption peaked in May and June and is well below pandemic-era levels.

This article is for informational purposes only and does not constitute investment advice.