Key Takeaways:
US inflation is spreading beyond isolated sectors, with Goldman Sachs' proprietary breadth index reaching 6 out of 10 on a scale where 10 marks the 2022 peak, as markets price a 52% probability of a September rate hike.
Goldman Sachs economist Jessica Rindels' inflation breadth index — measuring the share of personal consumption expenditure categories rising above 3% — hit 6 on a weighted basis, exceeding the 1990-2019 historical average and approaching two-thirds of the 2022 crisis level.
"The broadening is real but far from the generalized surge of 2022," Rindels, an economist at Goldman Sachs, said in a research note. "The weighted reading is elevated because price increases are concentrated in high-weight categories, not because inflation is uniform across the economy."
The unweighted breadth index stands at just 2 out of 10, indicating that price increases remain confined to a relatively narrow set of categories. The fastest-rising segments include video and audio services, financial services, medical care, and air transportation — all of which carry above-average weight in the PCE basket. Housing rent, while still a contributor, is expected to cool below 3% by the fourth quarter, Rindels said, which would reduce the breadth index further.
The data arrives as the Federal Reserve holds its benchmark rate at 5.25% to 5.5%, where it has remained since July 2023 after a cumulative 525 basis points of tightening. Fed Chair Kevin Warsh's hawkish congressional testimony last week sharpened the policy debate. CME FedWatch data show traders pricing a 52% probability of a 25-basis-point rate increase at the September meeting, up from roughly 30% a month ago. The two-year Treasury yield, which had climbed toward 4.3% after Warsh's remarks, settled at 4.18% Monday as markets absorbed the implications. S&P 500 futures rose about 22 basis points in early trading, suggesting investors see the broadening as manageable rather than alarming.
The Goldman framework uses a three-filter methodology: PCE data as the base, a six-month annualized rate to smooth volatility, and separate weighted and unweighted calculations. The weighted approach assigns each category its share of consumer spending, while the unweighted treats all categories equally. The gap between the two readings — 6 versus 2 — is the key analytical signal, Rindels said.
The Fed's Dilemma
The last time inflation breadth approached current levels was in mid-2023, when the weighted index briefly touched 5.5 before retreating as goods prices normalized. That episode preceded a 75-basis-point cumulative tightening over the following six months, though the Fed ultimately paused as shelter costs began decelerating. If housing rent follows the Goldman forecast and falls below 3% by year-end, the weighted breadth index could decline to around 4, reducing pressure on the Fed to act.
But the risk is that energy prices complicate the outlook. Brent crude has held above $85 a barrel for three consecutive sessions as renewed US-Iran tensions around the Strait of Hormuz disrupt supply routes. Higher oil prices feed directly into transportation costs and indirectly into a broad range of consumer goods, potentially sustaining the breadth reading above historical norms.
Market Pricing vs. Reality
The 52% probability of a September hike embedded in fed funds futures represents a significant repricing from early June, when markets saw virtually no chance of additional tightening. Yet the muted equity market reaction — the S&P 500's 22-basis-point gain — suggests investors are not treating the broadening as a systemic threat. The contrast echoes the pattern of 2023, when inflation breadth rose but the economy avoided a hard landing.
For investors, the core tension is between the breadth index's level — elevated but far from crisis — and the direction of travel. If housing rent cools as Goldman expects, the inflation story loses its most powerful driver. If energy prices keep rising, the breadth index could push toward 7 or higher, forcing the Fed's hand. The September meeting, with its updated dot plot and press conference, will be the next major inflection point.
This article is for informational purposes only and does not constitute investment advice.
