Goldman Sachs raises US inflation forecast to 2.9% and lifts recession risk to 25%

Goldman Sachs revised its 2026 US economic outlook on Friday, raising its inflation forecast by 0.8 percentage points to 2.9% and cutting its GDP growth projection to 2.2%. The bank also lifted its probability of a US recession this year from 20% to 25%. All three changes are directly tied to sustained high oil prices driven by the ongoing Strait of Hormuz crisis, which has blocked an estimated 10 million barrels per day of Gulf output from reaching international markets.

These are not small adjustments. A 0.8 percentage point jump in an inflation forecast from a major bank reflects a genuine reassessment of where price pressures are headed, not a rounding error. And moving the recession probability up by five points to 25% signals that Goldman's economists now see a one-in-four chance the US economy contracts within the next twelve months. That is a level of risk that changes how institutional investors position portfolios and how the Federal Reserve weighs its next move.

What the inflation number actually means

The Fed's stated target is 2% inflation, measured by the Personal Consumption Expenditures price index. Goldman's revised baseline of 2.9% puts the US nearly a full percentage point above that target through the end of 2026, which makes rate cuts significantly harder to justify. The Fed cut rates three times in late 2024 as inflation appeared to be cooling. A return toward 3% PCE inflation would almost certainly put those cuts on hold and could force a reversal if the oil shock persists long enough to feed through into services prices and wage expectations.

Goldman's more severe scenario involves Brent crude reaching $110 per barrel and staying there. In that case, the bank's model projects US inflation climbing to 3.3%. That scenario is not a tail risk. Brent was already trading above $103 on Sunday, and options markets are pricing meaningful probability of $110 or higher through Q2 2026. The gap between the baseline and the severe scenario is smaller than it looks.

How oil prices translate into broader inflation

Oil does not just affect gasoline prices. It feeds into the cost of plastics, fertilizers, shipping, and air travel. When crude prices stay elevated for more than a few weeks, those costs work their way into producer price indexes and eventually into what consumers pay at the store. The 2021 and 2022 inflation surge was driven partly by energy, but also by energy costs rippling through supply chains that were already under stress. If oil stays above $100 for the rest of the quarter, a similar transmission effect is likely.

Goldman's economists noted in their Friday report that the current shock differs from 2022 in one important way: the US economy is starting from a position of near-full employment with consumer spending still relatively firm. That means demand-side inflation is not dead yet. An oil shock hitting a still-active economy tends to produce stickier inflation than one hitting an economy that is already slowing. The Fed will be watching wage growth data closely in April to see if that dynamic is starting to develop.

Oxford Economics and the global picture

Oxford Economics issued a separate warning covering the eurozone, the United Kingdom, and Japan. Their analysis found that oil reaching $140 per barrel would be sufficient to tip all three economies into contraction. The eurozone is the most exposed of the three. Europe imports a higher share of its energy than the United States does, has less domestic production to fall back on, and is still dealing with elevated energy costs that have persisted since the 2022 Russian gas supply disruption.

Japan is in a particularly awkward position. The Bank of Japan has been carefully unwinding its ultra-loose monetary policy after decades of near-zero rates and is trying to manage a currency that has been weak against the dollar. An oil shock that drives inflation up while simultaneously slowing growth puts the BOJ in a position where neither hiking nor cutting rates provides a clean solution. The UK faces similar stagflation pressure, with the Bank of England already dealing with above-target inflation and sluggish GDP growth heading into 2026.

The Fed's options are narrower than they were six weeks ago

Before the Hormuz crisis escalated, federal funds futures markets were pricing roughly two Federal Reserve rate cuts by the end of 2026. Those expectations have shifted materially. As of Friday's close, futures markets were pricing less than one cut, with some contracts implying a higher probability of no cuts at all than of two. That shift happened in under three weeks, which tells you how fast the energy shock changed the rate outlook.

The Fed's March meeting is scheduled for March 25 and 26. Chair Jerome Powell's press conference on March 26 will be the first major opportunity for the central bank to address the oil shock publicly and signal how it is weighing inflation risk against the rising recession probability. Goldman's revised forecast of 25% recession risk gives Powell a specific number to respond to, one way or another.

Goldman's next formal economic update is expected in early April, after the March jobs report and CPI data are released. Those two data points will determine whether the bank moves its recession probability higher again or holds at 25%.