The End of Magical Thinking

J.P. Morgan declares the end of the 'Goldilocks' economic environment as sticky inflation and energy shocks force interest rates higher despite underlying resilience.

Key Takeaways

• 1.The 'Goldilocks' era of easy growth and low inflation is ending, replaced by resilient but imbalanced expansion and sticky inflation.
• 2.Energy shocks, specifically a major crude price surge linked to geopolitical tensions, represent a critical adverse risk to global GDP.
• 3.US inflation remains stubborn, with core PCE projected to hover around 3%, driven by persistent service price stickiness and high health care costs.

Table of Contents

• The view: Goldilocks has left the building
• Baseline: Resilience, recoupling, and sticky inflation push rates up
• An unusual energy price shock …
• ... meets an imbalanced expansion ...
• ... buffeted by multiple shocks
• A backdrop of solid foundations …
• ... reflected in supportive fin. conditions
• 2025: A year of US policy chaos damped sentiment
• AI fueled tech, Asia GDP and global mfg
• Caution depressed non-tech spending and hiring across the globe
• US job stall not an AI disruption story
• Households saved the day in 2025 …
• ... laying groundwork for cyclical lift
• The prize: employment growth back to a 0.8%ar gain
• The risks: Strait is still closed, US consumers insecure, European angst
• Cyclical lift and Strait to boost core goods prices
• Service price stickiness persists
• Slack divergence increases uncertainty
• Labor cost dynamics straightforward in Europe and Japan …
• … but are harder to read in the US
• US underlying inflation remains close to 3%
• Divergent trajectory in US CPI, PCE to persist
• Productivity boost largely a US affair so far
• Productivity link to cycle is not straightforward
• Help coming from front-loaded global fiscal ease
• On net, US supply side looks weak
• A mild US recession is not a mild event
• Global Economic Outlook Summary
• J.P. Morgan US forecast
• Global Central Bank Watch: J.P. Morgan and Market

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