Global inflation was supposed to be cooling. Before the latest energy shock, that remained the dominant direction of travel. The IMF now projects global consumer-price inflation of 4.4% in 2026. Separately, the OECD projects aggregate G20 headline inflation of 4.0%, 1.2 percentage points above its previous expectation.
These are not directly comparable measures. One is a global IMF projection; the other is an OECD projection for the G20. They point, however, in the same direction. The Middle East conflict has disrupted energy and commodity markets, raised costs across economies and put central banks back on alert.
The country-level picture remains uneven. The IMF projects average consumer-price inflation of approximately 387% for Venezuela, 69% for Iran and 30% for Argentina in 2026. In Turkey, annual food inflation was approximately 35% in May. Argentina is stabilising, but it is not yet out of the inflationary cycle.
The divergence among major central banks is becoming the more significant story. New Federal Reserve Chair Kevin Warsh begins his tenure with US inflation above target, a resilient domestic economy and market expectations that have moved sharply away from near-term easing. Rate cuts are no longer treated as the obvious next step, and the possibility of renewed tightening has returned to the discussion.
Europe faces a different configuration. The ECB and the Bank of England must respond to the same energy shock through economies with weaker growth and greater sensitivity to imported energy costs. The ECB has already tightened as an insurance measure, even as euro-area growth remains subdued. The Bank of England faces a similar inflation-growth trade-off.
The G10 monetary corridor is therefore not moving uniformly. It is splitting.
The less discussed point is that inflation is not merely the original problem. It is also part of the bill for the credit expansion that preceded it. A prolonged period of cheap money altered how capital was priced and allocated. When a supply shock arrives in that environment, it does not encounter a clean system. It encounters one already stretched by leverage, duration risk and compressed risk premia.
What is attracting capital is no longer just a high policy rate. It is the broader US exceptionalism trade: positive real rates, a comparatively resilient domestic economy and expectations of technology-driven productivity growth. Together, these forces continue to support demand for dollar assets.
For emerging-market central banks, dollar strength is itself a tightening mechanism. It raises the domestic cost of imported goods and dollar liabilities, constrains room for policy easing and can force central banks to defend currencies even when domestic growth is weakening.
For investors, the behavioural implication remains underappreciated. Cash and short-duration instruments can once again offer a positive real return. That changes the opportunity cost of taking duration, credit and equity risk.
Portfolio construction developed during the zero-rate period assumed that idle liquidity carried a substantial cost. That assumption no longer holds in the same way. When waiting has a return, risk must offer more than participation. It must offer adequate compensation.
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