Every 10% rise in oil increases inflation by two-tenths, Goldman calculates.
Things aren't looking so great on the economic front 12 days into the U.S.-Israeli attack on Iran. Not only did oil prices again touch triple-digit levels, there are worries about supplies of everything from fertilizer to helium, important not just for party balloons, but semiconductor production.
Goldman Sachs economists Manuel Abecasis and David Mericle in a new research note looked at the economic implications of the Iran war on the U.S. economy.
And, to be clear, the main risk really is oil. "The main transmission channel from the war with Iran to the U.S. economy is the price of oil," they said. Goldman's oil team just raised their forecasts for the second time in little over a week, now expecting the Brent contract (BRN00) to average $98 for March and April - up 40% from the 2025 average.
Their rule of thumb is that a sustained 10% increase in oil boosts the inflation rate by 0.2 percentage points, and the core inflation rate by 0.04 points. Similarly, a sustained 10% rise in oil lowers GDP growth by a tenth, though that could be tempered depending on how domestic producers respond.
The impact of tighter financial conditions also weighs on the economy. For every 1 percentage point tightening in their financial conditions index, GDP growth is hurt by 1 point over the following year. So far, Goldman's financial conditions index has tightened by 0.2 percentage points.
But the economy can be impacted by more than just swings in financial markets. The Goldman team cite Federal Reserve research that higher geopolitical risk weighs on both hiring and capital expenditure. When the shocks to geopolitical risk and oil prices occur simultaneously -- like right now - the impact is twice as large. Higher geopolitical risk and oil prices also weigh on consumer confidence, although only briefly, the research finds.
Granted, there are some ameliorating factors too. The U.S. economy is less reliant on oil than it was during the supply shocks of the 1970s. The stock market, as measured by the S&P 500 SPX, is only down 1% this year, so there's no significant negative wealth effect, so far. The U.S. economy also is less sensitive to the most relevant chokepoints of the Strait of Hormuz and Red Sea shipping, which account for less than 5% of international trade.
Putting it all together, here's the Goldman economic forecast.
Inflation, as measured by the PCE price index that the Fed favors, will reach 2.9% year-on-year in December, which is 0.8 percentage points higher than the firm previously forecast (and well above the Fed's 2% target). Goldman's core inflation forecast also rose, by a more modest two-tenths of a point, to 2.4%. That will take the fourth-quarter GDP year-on-year forecast down by three-tenths, to 2.2%. The unemployment rate will peak in the fourth quarter, at 4.6%, and the risk of recession over the next 12 months is 25%, which the firm says is right in line with the Wall Street consensus.
It also means the Federal Reserve will be slower with rate cuts. The two cuts they forecast for June and September are now seen for September and December. That said, earlier cuts are still possible if the labor market weakens sooner, or more substantially, that they expect.
