26.08.2026 - Inflation - Far from Defeated
The Federal Reserve’s preferred inflation measure provided another reminder today that inflation remains far from defeated.
The Personal Consumption Expenditures (PCE) Price Index rose 0.2% month-on-month in July, pushing the annual headline inflation rate to 3.7%. Both readings came in 0.1 percentage point above market expectations.
Core PCE, which excludes volatile food and energy prices and is generally considered a better indicator of underlying inflation trends, increased 0.2% month-on-month and 3.3% year-on-year, in line with expectations.
Markets: reacted negatively to the inflation data,
Equities: Europe higher while US falls
Bonds: yields rebound after yesterday’s drop - US 10y yield back at 4.66%, Japan 10y yield 2.89%
Commodities: Oil prices fall for second day, WTI around USD 81/barrel and Brent around USD 87/barrel
Precious metals prices little changed, gold at USD 4’615/oz, silver moves towards USD 68/ozCurrencies: US dollar moves higher, Japanese Yen falls again, USDJPY 159
Cryptos: lower after recent rally - Bitcoin above USD 78k
Volatility: The VIX index remains low around 15 (still good opportunity for hedging)
My View: As highlighted repeatedly in recent publications, inflation remains one of the most important indicators to watch going forward.
And the environment is hardly supportive of a sustained return toward the Fed’s 2% target. Tariffs, renewed trade wars, geopolitical conflicts and elevated commodity prices all have the potential to create additional inflationary pressure.
At the same time, extremely high government debt levels and rising bond yields are pushing debt-servicing and refinancing costs increasingly higher.
This creates a difficult combination for the Federal Reserve.
The risk is that the Fed remains behind the curve. If inflation proves more persistent or starts accelerating again, policymakers could eventually be forced to raise rates faster, even as economic growth and the consumer are already weakening.
That would intensify the pressure from both sides: higher prices reduce purchasing power, while higher interest rates increase financing costs for consumers, companies and governments.
The first cracks are already visible in the US consumer. As highlighted in my recent Market Insights, July retail sales fell, “help with mortgage” are googled like in 2008.
The longer inflation stays elevated, the more difficult the situation becomes.
The Fed faces an increasingly uncomfortable choice: tolerate inflation above target or tighten financial conditions further and risk accelerating the economic slowdown.
Neither is particularly attractive for financial markets. Inflation is therefore not just an inflation story anymore. It is increasingly becoming a growth, debt and financial-stability story as well.
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