Headline snapshot
Market readings entering 2026 paint a patchwork of inflation experiences. Advanced economies are slowly cooling: headline CPI sits around 2.8% in the United States, 2.1% in the euro area and about 3.6% in the United Kingdom. Emerging markets tell a different story: Brazil 5.4%, India 6.0% and Turkey an extreme 45.0% year‑on‑year. Shorter‑term momentum diverges too — three‑month annualized inflation eased by roughly 0.4 percentage points in the US, held steady in the euro area and accelerated in Brazil by about 1.2 points. In short: global inflation is not moving in unison.
Why the split? The big drivers
Several forces explain the divergence.
- – Services vs goods: In advanced economies services inflation is proving stickier than goods. Services — heavily influenced by wages and housing costs — account for roughly 60–70% of the core inflation overshoot in many countries. Shelter and rents alone explain an estimated 30–40% of US core inflation.
- Commodity and exchange‑rate swings: Energy and food moves hit headline rates first. Exchange‑rate depreciation then passes through to import prices, amplifying pressures in open, net‑importing economies.
- Idiosyncratic shocks: Conflict, policy changes or one‑off fiscal moves push some emerging markets well above global averages.
- Labor and fiscal channels: Nominal private‑sector wage growth in advanced economies is near 4.0% year‑on‑year, but real wages remain squeezed after earlier inflation. Unit labour costs matter for firms’ pricing choices, while fiscal impulses — from transfers to broader stances — shape domestic demand.
Monetary policy and market positioning
Central banks have split their playbooks. Policy rates are sitting at restrictive levels in many major economies: the Fed funds target at 5.25%–5.50%, the ECB deposit rate at about 3.75% and the Bank of England around 4.25%. Balance sheets have also retraced from pandemic peaks — US Treasury holdings are roughly 15% below their high, euro‑area asset holdings about 10% lower.
Markets are pricing this uncertainty unevenly. OIS‑implied curves suggest mean expected easing of around –75 basis points for the Fed and –50 for the ECB over 2026–27, but timing is highly data‑dependent. Communication from central banks has become more state‑contingent, so monthly inflation prints and payroll surprises now carry extra weight.
Financial market pulse: yields, spreads, currencies
Nominal and real yields reflect differing growth and inflation expectations. Ten‑year yields stand near 3.90% in the US, 2.45% on the German Bund and 3.65% on the UK gilt. Real yields on 10‑year TIPS are about 0.40%, suggesting that markets are not yet pricing a sustained rise in real policy rates. Credit conditions have loosened somewhat: investment‑grade spreads tightened roughly 30 basis points and high‑yield about 70 since mid‑2025. The dollar has been roughly flat year‑to‑date but jumps around key US datapoints.
Sectoral and distributional effects
Inflation is not uniform across the economy.
- – Services and shelter: Where labor is tight and rents are rising, services inflation persists, weighing on overall core measures and household budgets.
- Manufacturing: More sensitive to commodity inputs and global supply‑chain disruptions.
- Housing: Rents and owner‑equivalent rent move slowly and can sustain core inflation for quarters.
- Corporate and fiscal impacts: Higher input costs squeeze margins for firms with weak pricing power, while commodity exporters can see higher nominal revenues that ease fiscal stress even as domestic prices climb.
Wages, commodities and funding conditions
Brent crude has averaged about $85/barrel over the past six months and industrial metals are roughly 12% higher year‑on‑year. With nominal wages around 4.0% in advanced economies, those input pressures feed into producer and consumer prices unless productivity improves. Across countries, fiscal stances differ — the US shows a mildly contractionary net fiscal impulse (around –0.2% of GDP for 2026), while several emerging markets lean slightly expansionary — a divergence that reshapes demand and the policy response.
Macro consequences and market implications
If core inflation stays north of 3.0% and policy tightens further, model estimates point to a modest hit to growth — headline GDP could be 0.3–0.5 percentage points lower in 2026 under such scenarios. Equity risk premia would likely rise (an estimated 20–40 basis points), compressing valuations, while low‑pricing‑power sectors could see EBITDA margins fall 50–150 basis points. For highly indebted sovereigns, a 50 basis‑point rise in long yields would add roughly 0.2–0.4% of GDP to annual interest bills.
Near‑term outlook and probabilities
The central scenario — assigned about a 60% probability under current market pricing — is gradual disinflation in advanced economies with only limited easing: one to two Fed cuts in late 2026–early 2027. That path implies a baseline 10‑year US yield range of roughly 3.25%–4.50% over the next 12 months. Emerging markets, however, face greater upside risks driven by commodity volatility and exchange‑rate moves; median headline inflation there could land in the 4.5%–7.5% range, conditional on commodity trends.
Risks that would change the story
Tail events could push outcomes sharply off the baseline. Among the biggest are:
- – An energy shock that lifts commodity inflation globally.
- Faster‑than‑expected wage growth across large service sectors.
- Geopolitical flare‑ups disrupting trade or energy flows.
- Sudden shifts in investor sentiment that widen term premia and credit spreads.
Why the split? The big drivers
Several forces explain the divergence.0
Why the split? The big drivers
Several forces explain the divergence.1
Why the split? The big drivers
Several forces explain the divergence.2