As retail giants like Walmart and Target consider raising prices in response to tariffs under the current administration, wealth advisors and RIAs are likely fielding client questions about the potential for another inflation surge. Memories of the 2022 inflation spike—when price increases hit a 40-year high—are still fresh, and the possibility of tariffs driving similar trends is cause for concern among investors.
However, there’s reassuring news for financial professionals navigating these conversations. According to Goldman Sachs, the inflationary effects of tariffs are expected to be short-lived, with minimal long-term impact on broader economic trends. In a note released Monday, Goldman Sachs’ economists predict core Personal Consumption Expenditures (PCE) inflation to climb to 3.6% by the end of 2025. The firm emphasizes that this increase will reflect a one-time adjustment rather than a sustained inflationary surge.
Three Reasons Inflation Won’t Mirror 2022 Levels
Goldman Sachs highlights three key factors that differentiate today’s economic environment from the inflationary period of 2021-2022. These insights can provide wealth advisors with the context needed to guide client portfolios and financial strategies effectively.
1. Limited Scope of Tariff-Induced Inflation
Unlike the broad inflationary pressures of 2022, the impact of tariffs is expected to be contained. David Mericle, Goldman Sachs’ chief U.S. economist, estimates that tariffs will raise consumer prices by just 2% over the next 18 months. This modest increase stems largely from higher import costs and elevated domestic production expenses. Crucially, the smaller magnitude of price changes reduces the risk of inflation becoming entrenched in consumer and corporate behavior, such as pricing strategies and wage-setting practices.
For RIAs, this means inflation-driven shifts in client spending or investment behavior may be less pronounced, allowing for a more stable approach to financial planning.
2. Cooling Labor Market
The labor market dynamics that fueled the wage-price spiral of 2022 have significantly softened. A tight labor market back then led to rising wages, which, in turn, drove prices higher. Today, job availability has declined, making it harder for workers to negotiate wage increases. Goldman Sachs’ wage survey indicator—a measure of wage growth expectations—has dropped from over 4% in 2022 to 2.9% currently.
This subdued wage growth is a critical factor in curbing inflation. For wealth advisors, this translates to more predictable cost-of-living adjustments and reduced pressure on clients to seek aggressive portfolio growth to offset rising expenses.
3. Decreased Consumer Demand
Consumer spending power has diminished significantly compared to the pandemic years, when stimulus measures and excess savings enabled households to absorb higher prices. With much of that cash buffer now depleted, companies have less room to raise prices without jeopardizing sales.
This dynamic further weakens inflationary pressures, providing a disinflationary tailwind to the economy. For RIAs advising clients on discretionary spending and budgeting, this trend highlights the importance of adjusting expectations for consumer-driven sectors.
Economic Implications for Advisors
While a weaker economy may limit growth opportunities, it also dampens inflationary risks. Goldman Sachs projects GDP growth to slow to just 1% this year, with unemployment expected to rise to 4.5%. In this environment, inflation is unlikely to remain elevated for long periods.
“We are skeptical about the prospects for prolonged high inflation amidst mediocre economic performance,” Mericle noted in the report.
Goldman Sachs anticipates the most significant tariff-driven inflationary effects will appear between May and August of this year before gradually fading. This timeline provides advisors with a clear window for assessing potential impacts on client portfolios and preparing for market shifts.
Practical Takeaways for Wealth Advisors and RIAs
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Client Communication: Use Goldman Sachs’ data to reassure clients that inflation risks are manageable and largely transitory. Emphasize that tariffs are unlikely to spark a repeat of 2022’s inflationary spiral.
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Portfolio Adjustments: Focus on sectors less sensitive to short-term inflation pressures, such as technology and healthcare. Consider inflation-protected securities for clients concerned about preserving purchasing power.
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Long-Term Planning: Reinforce the importance of maintaining diversified portfolios to navigate modest economic growth and shifting inflation dynamics. Highlight that stable wage growth and reduced consumer spending provide a favorable backdrop for long-term investment stability.
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Market Timing: Monitor inflation reports closely between May and August to identify potential market opportunities or risks. This period will be critical for recalibrating strategies based on emerging trends.
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Budgeting and Cash Flow: Advise clients to review and adjust budgets to account for modest price increases without overreacting to temporary inflationary pressures. This is particularly relevant for retirees and fixed-income investors.
By framing the current economic landscape within these parameters, wealth advisors and RIAs can provide clients with clarity and confidence in navigating the months ahead. The message is clear: while tariffs may cause a brief uptick in inflation, the broader economic environment remains conducive to long-term financial planning and investment success.
