Inflation and the US Job Market: What to Expect

The current state of the US economy is a topic of interest for many, with inflation and job market trends being closely watched. According to Goldman Sachs Research, progress on core PCE inflation has stalled at 2.8% year-over-year. However, it’s estimated that the passthrough from tariffs to consumer prices has contributed 0.5 percentage point, primarily in goods categories. This implies that inflation excluding the one-time effect of tariffs has already fallen to 2.3%.

Labor Market Rebalancing

The team at Goldman Sachs Research also expects labor market rebalancing and the exhaustion of catch-up inflation to drive inflation toward the Federal Reserve’s target this year. Catch-up inflation refers to prices that adjust with a longer lag and therefore keep rising at a faster pace until they have caught up. This process is crucial in understanding how inflation will behave in the coming months.

Key Indicators for Inflation

Two valuable indicators for forecasting inflation further ahead are the state of the labor market and leading indicators of rent inflation. Currently, these indicators point to lower inflation than they did late last cycle. Additionally, Goldman Sachs Research’s wage growth tracker has fallen by more than 2 percentage points to 3.5% as the labor market rebalances.

The US Job Market in 2026

Looking ahead to 2026, there are questions about whether the US job market will improve. Goldman Sachs Research expects the unemployment rate to stabilize at 4.5%. However, there are risks to consider, including a weak starting point for job growth, a slow trend in job openings, and companies discussing layoffs and looking to use AI to reduce labor costs.

Uncertainty in the Labor Market

The labor market is seen as the most uncertain piece of the 2026 outlook. A period of jobless growth, similar to the ‘jobless recovery’ of the early 2000s, is considered a plausible alternative scenario. Much of the decline in job growth in 2025 was due to a decrease in labor supply growth caused by the dramatic drop in immigration. Now, the economy is estimated to need fewer than 70,000 jobs per month for the unemployment rate to hold steady in 2026.

Conclusion

In conclusion, the future of inflation and the job market in the US is complex, with various factors at play. Understanding these trends is crucial for making informed decisions about the economy. While there are uncertainties, especially in the labor market, it’s clear that inflation is moving towards the Federal Reserve’s target. The coming year will be important in determining the direction of the US economy, with close attention being paid to labor market rebalancing and the indicators that point to future inflation trends.