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The impact of the Iran war on global oil prices could push the rate of inflation facing U.S. consumers higher, which would leave Federal Reserve policymakers in a difficult spot as they weigh possible interest rate cuts.
An analysis by economists at Goldman Sachs projected that Brent crude oil prices, a common benchmark for the global oil market, are expected to remain elevated, averaging $105 a barrel in March and $115 in April before falling to $80 a barrel in the fourth quarter of 2026. That’s based on oil shipments through the Strait of Hormuz remaining very low for six weeks.
In an adverse scenario where oil flows are disrupted for 10 weeks, the firm estimates Brent oil would peak at $140 a barrel and decline to $100 a barrel in the fourth quarter of 2026. A severely adverse scenario that includes disruptions for 10 weeks and infrastructure damage is a persistent hit to oil production would yield a peak at $160 a barrel and put oil at $115 a barrel in the fourth quarter of 2026.
“Most of the impact of the war on U.S. inflation will come from higher oil prices,” the Goldman economists said, noting that their “rule of thumb is that a 10% increase in oil prices raises headline PCE inflation by 0.2pp and core inflation by 0.04pp,” with much of the rise coming from transportation costs.
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Goldman Sachs’ analysis also included a look at other commodities like fertilizer that could have higher costs due to limits on exports from the Gulf. It estimated that higher fertilizer prices could boost food prices by about 1.5% this year, raising headline inflation by 0.1 percentage point.
Additionally, second-round effects stemming from higher inflation expectations could boost inflation by 0.1 of a percentage point by the end of 2026 under the baseline scenario, or 0.4 of a percentage point under the severely adverse scenario.
Those factors could push the Federal Reserve’s preferred inflation gauge higher. The personal consumption expenditures (PCE) index was up 2.8% on a headline basis in January, while core PCE, which excludes volatile measures of food and energy, was up 3.1% in January. Both figures were well above the Fed’s long-run target of 2% inflation, and policymakers opted against cutting rates at their last two meetings given the elevated readings.
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The Goldman Sachs economists’ analysis finds that, given higher oil prices, the impact on food prices and the more mild impact of other commodities and inflation expectations, they raised their December 2026 PCE inflation estimate by 0.2pp to 3.1% in the baseline scenario.
In the adverse scenario, PCE inflation would be 3.6% in December after peaking at 4.6% this spring, while the severely adverse scenario would leave PCE inflation at 4% at the end of the year after peaking at 4.9%.
The firm also raised its core PCE inflation forecast to 2.5% at the end of the year in the baseline scenario, while it would be 2.6% in December under the adverse and severely adverse scenarios.
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Goldman Sachs also lowered its forecast for economic growth, reducing 2026 gross domestic product (GDP) growth to 2.1% in the fourth quarter compared to the same period the prior year or 2.4% on a full-year basis under the baseline scenario. The GDP growth forecast would fall to 1.9% fourth quarter-to-fourth quarter in the adverse scenario and 1.8% in the severely adverse scenario.
The firm also raised its 12-month recession probability by 5 percentage points to 30%.
The economists didn’t alter their baseline forecast for Federal Reserve interest rate cuts, which featured two 25 basis point rate cuts in September and December. They explained that they expect the unemployment rate to rise to 4.6%, above the 4.4% median projection of Fed policymakers at their latest meeting.
However, they did raise the probability of the Fed staying on hold this year from 20% to 25%, while lowering the probability of insurance cuts from 15% to 10%, due to the relatively higher inflation readings they anticipate.
