Macro Moments Weekly: Dog Days of Summer—Scratching the Inflation Itch

Key Takeaways:

• The outlook is largely unchanged: Geopolitical risks persist, inflation remains elevated and central banks are still expected to keep rates relatively high.
• Inflation may prove stickier than markets expect: Stronger growth, government spending and ongoing supply constraints could keep price pressures elevated for longer.
• Equities remain favoured over bonds: Resilient growth supports stocks, while higher inflation and fiscal concerns continue to weigh on bond markets.

As many investors return after summer holidays, the instinct is to look for something new. What’s changed? What should we consider repricing? Has the wind changed direction?

More often than not, the answer is ‘no,’ and there is plenty of evidence to back this up. As we gear up for the year’s final quarter, there has been no resolution of anything in the world of geopolitics. The price of oil continues to revolve around a neat corridor, depending on the news from the Gulf. The Russia-Ukraine war continues to grind on, the upcoming US midterms continue to show signs of Democratic success, whilst the Trump administration continues its tariff campaign, this month on its northern neighbour, Canada.

US economic data continues to show progress, with the latest Purchasing Managers’ Index (PMI) data being particularly positive. However, inflation, in particular core inflation, is now proving sticky. The same can be seen in Europe, where PMI data continues to surprise to the upside, as does inflation. There seems to be a corridor of 2.9%–3.2% for the major economies and this has reinforced the pre-existing view that the European Central Bank (ECB) could raise interest rates in September. Nothing new, just more certainty.

The market has taken a view that inflation is transitory, whether it is driven by higher oil prices, rising food prices as the European drought-hit harvest takes effect or high gas prices as Europe tries to rebuild stocks ahead of winter. It is pricing in no more than two rate rises from the Federal Reserve, the ECB and the Bank of England by this time next year.

But in Asia the picture is very different. In Japan, the market is pricing in three potential rate hikes, whilst in Australia it is pricing in one increase and then the potential for cuts. The market is pricing in economic growth through to mid-2027 that is subdued enough to relieve inflationary pressure right across the globe, whether caused by higher-for-longer oil prices or the rate rises themselves.

At the same time, deficits are a concern. Governments have the desire to spend—on defence, on energy, on infrastructure, on growth. Reviving growth is seen as the key to most incumbents’ political survival, and the bond markets don’t seem to like it. The debate around interest costs as a percentage of GDP is getting loud in France, the United Kingdom and the United States, which reflects the view that the end of the fiscal road is near.

So we are in a period where governments would like to spend more, and certainly will not spend less, while business confidence is rising. The question is whether inflation is just a blip. Sure, the vacancy and employment data are not showing signs of tightening at the moment and consumer confidence remains lower than at the start of the year in the United States and Europe. But as these economies improve, one would think this will surely change. But what about artificial intelligence? Rising productivity means fewer jobs, which keeps the pressure on the consumer. Perhaps—but as yet, unproven.

The simple reality as we return to our desks is that growth in 2026 will turn out to be better than we expected, more resilient to shocks than we thought, and that in a world where supply lines are re-configuring as well as tightening, inflation doesn’t look to be going away. It’s been a good-news environment for equities, not a great year for bonds, and there is little to suggest a change any time soon.

The more you look, the more the wind is still blowing in the same direction.

Parting Shot

Whilst drought in the United Kingdom is hurting a wide range of arable and livestock farmers, I would like to raise a toast to viticulture. The winemakers in 2026 could see the biggest and best harvest ever. Picking has already started a month early in many locations. Cheers!