Higher gas prices, inflation will 'negate' some tax cuts: Goldman Sachs' Mericle

Summary

• Headline inflation spiked in March (3.3%) and is expected to rise sharply again in April, pushing the annual rate from the mid-2% range to ~4% within months.
• Core inflation forecast for the year raised by 0.3 percentage points; initial signs of energy price pass-through are visible in airfares, with more gradual effects expected elsewhere.
• Consumer sentiment hit a record low, a typical and rapid response to the spike in gasoline prices driven by geopolitical conflict.
• The surge in energy prices and broader inflation will largely negate the boost to real incomes from recent tax cuts, which were expected to have maximum impact now.
• Real income growth forecast for the year is downgraded to ~1.5% from over 2%, a meaningful blow to consumer spending power.
• No expectation for renewed upward pressure on wages, as wage growth has been moderating with a rebalancing labor market.
• Maintains expectation for two Federal Reserve rate cuts this year, with the rationale evolving: progress on inflation is still expected as tariff effects drop out of year-on-year calculations later in 2025.
• A key uncertainty is the Fed committee's willingness to look through tariff-inflated data; the official and tariff-adjusted inflation stories should converge later in the year.