Is hot global inflation set to resurge? Widely feared consumer price index acceleration in the US, UK and elsewhere – alongside US tariffs – has many fearing a return to the 2021-2022 period. That supposedly will whack global consumers and “much needed” 2026 rate cuts.
It is time to turn down the drama. Despite some tiny upticks globally, the inflation war is over.
First, understand this: when wars end, their destruction is not magically reversed. Peace just stops new destruction. It is the same with inflation. Current prices remain well above pre-pandemic levels, frustrating many.
The US’s CPI sits 26.4 per cent above December 2019 levels. The Eurozone’s harmonised index of consumer prices (HICP) is up 22.8 per cent. Canadian and Australian CPI are up 20.9 and 21.5 per cent, respectively. The UK’s is even worse, up 28.3 per cent.
CPI also understates many people’s experience. Hence, inflation angst is understandable. And fighting the last war – in this case, the recent years’ nosebleed inflation – is a natural, human response.
But prices and inflation are different. Inflation is the speed of changing prices – now 3 per cent year-on-year in America and 3.8 per cent in Britain, based on September CPI. Australia’s inflation of 3 per cent year on year in August echoes those. The Eurozone and Canada’s relatively cooler 2.2 per cent and 2.4 per cent September readings, respectively, nonetheless exceed hoped-for rates – and accelerated from August.
Current inflation pales versus recent highs. Since peaking at 9.1 per cent year-on-year in June 2022, US CPI cooled irregularly to September’s 3 per cent – above the Federal Reserve’s target (which is not based on CPI, for the record) but hardly indicating galloping prices.
The Eurozone’s 2.2 per cent year-on-year September inflation is far below October 2022’s 10.6 per cent peak and hovers around the European Central Bank’s 2 per cent target. UK, Canadian and Australian inflation trends all echo that.
Yet no evidence exists that central banks can fine-tune anything precisely to the decimal point. And price indexes are not so pinpoint accurate themselves. But the “war” is over.
Yes, overall prices are still rising globally, but they rarely fall. Select categories may, but broadly falling prices – deflation – almost never occurs, thank goodness.
Why? Deep deflation means severe economic contraction – far deadlier than inflation. Consider the US for its global economic might: Reversing US CPI’s post-pandemic rise would mean a situation close to the deflation seen during the Great Depression of 1929 to 1933, or the post-First World War downturn of the early 1920s.
Falling prices sound nice. But deep deflation drives consumers to delay non-essential purchases, expecting lower prices ahead, causing economic activity to collapse.
Winning the inflation war was never about dropping prices, just slowing their rise. Governments never seek zero or negative inflation anyway. Why? Because inflation is their friend, making repaying existing debt cheaper. US government debt tops $38 trillion. If inflation runs near 2 per cent – the Fed’s aim – this gets $760 billion cheaper in after-inflation repayment value every year.
Tariffs? Yes, they are bad economically. But US consumers, not those in targeted nations, will chiefly pay them. Tariffs always hurt the imposing country most. They temporarily skew demand, boosting select categories as businesses and consumers front-run new US taxes on imports.
But tariffs on select items differ from inflation. There is always a churn in prices of select goods or services, which simply governs supply and demand imbalances. Inflation is a broad price increase across the entire economy. It is too much money chasing too few goods and services. Only central banks cause true inflation.
Consider this: During 2020’s Covid chaos, monetary officials inexplicably and bizarrely ballooned money supply. The Eurozone boosted M3 nearly 13 per cent year on year in February 2021. The UK spiked M4 more: 15.2 per cent year on year in the same month. US M4 boomed 30.9 per cent year on year in June 2020. Later, prices galloped – keeping with the monetarist theory that policymakers broadly ignored.
What about now? In September, Eurozone M3 rose 2.8 per cent year on year. US and UK M4 rose 4.5 and 4.2 per cent year on year, respectively, in August. These figures are in line with the low-inflation, pre-pandemic years. They provide minimal fuel to reignite the inflation war.
Tariffs do not affect money supply. They may make some prices rise – mainly unique products people depend on, like generic medications – restricting consumer budgets and, thus, forcing down prices of other, potentially substituted products. Remember US President Donald Trump’s much-hyped first-term tariffs? American inflation never even reached 3 per cent year on year.
Contrary to popular perception, 2025’s US tariffs are not “universal”. Exemptions abound. Companies find ways – legally and illegally – to dodge others. Global prices will see only indirect, temporary effects from all this.
Fighting the last war will not give you an investing edge. Market forecasting requires seeing something big that others do not – and false global inflation fears do not count. Fear of a false factor is always bullish. So, stay bullish.
