Inflation Stalls Above Target as Growth Forecasts Improve

The inflation narrative has swung from one side of the boat to the other this year. The consensus view at the start of 2026 was inflation would fall and allow central banks to cut rates. Global conflicts pushed inflation higher and raised concerns that central banks would tighten aggressively. We viewed both positions skeptically. With energy pressures easing, the narrative has swung again toward the idea that the picture looks benign, so this week we step back and assess where inflation actually stands.

Start with the measure. Most commentary focuses on core inflation, which strips out food and energy. We find that framing difficult to defend because food and energy costs matter to every household. These items are also not necessarily the most volatile components every month. Removing volatile series helps in determining underlying trends, and we prefer trimmed means, which cut the tails of the distribution rather than pre-selecting categories. The Cleveland Fed's 16% trimmed mean removes the 8% tails on each side and shows the middle 84% of the distribution.

This measure now sits at 2.6% year-over-year versus a 2.0% average in the five years before the pandemic. The July reading annualizes to 2.7%, and 2026 to date also runs at 2.7%. Inflation has moderated from its peak, but it appears to be stalling somewhere between 2.5% and 2.75%. 

The breadth of high-price gains tells the same story. Roughly 33% of Consumer Price Index (CPI) components are rising at 5% or faster on a one-month annualized basis, compared with a 25% average before the pandemic and roughly two thirds at the 2021 to 2022 peak¹. The breadth has narrowed considerably, but it has not narrowed enough.

Looking beyond the U.S., CPI inflation across advanced economies now runs at 2.9% versus a 2015 to 2019 average of 1.4%. Both U.S. and global inflation remain too high, and it carries implications for both policy and portfolios. Higher policy rates around the world seem more likely than lower rates. We look to UK and Japanese inflation reports later this week for more color. On growth, three-month revisions to 2026 real GDP forecasts have moved higher for South Korea, the United Kingdom, Brazil, India, the United States, Germany, and Japan.

Bottom line: Inflation has moderated, but it has settled above target rather than returning to it. Firmer growth expectations allow central banks to keep their focus on price stability. We see this combination as supportive for higher policy rates globally.

Companies set prices, so what they tell us about their own pricing behavior carries real weight. The National Federation of Independent Business (NFIB) survey, updated last week, gives us a direct read on smaller firms.

Before the COVID pandemic, roughly 7% of small firms raised their average selling price in a given month. That share jumped to 49% on average across 2021 and 2022. It now averages 30% in 2026. The share of firms raising prices has declined, but the level remains far higher than when inflation was near the 2% target. 

Producer prices highlight another risk. We look past the headlines to the stages of production in manufacturing. Core unprocessed materials are rising 19.6% year over year, core processed materials 8.2%, and core finished goods 3.6%. Copper provides a useful example of how price pressures move through these stages of production, from raw copper (unprocessed) to copper wire (processed) and ultimately to printed circuit boards (finished goods).

History shows that the price gains at earlier production stages lead trends in the later ones, both up and down, as the 2021 and 2022 experience demonstrated. Today those earlier stages are accelerating again, which tells us goods price pressures are still working their way down the pipeline.

Bottom line: The share of firms raising prices has fallen but remains more than four times above pre-pandemic norms. Significant pressure also sits in the goods pipeline, which argues against assuming inflation resolves on its own.

We continue to believe the Fed’s next move will be a rate hike rather than a cut. We also continue to believe that move is not imminent.

A shift toward tightening can unsettle investors, because past transitions have proved difficult for markets. But this cycle starts from a different place. The real five-year yield stands at 2.15% today, whereas it sat in negative territory ahead of some prior episodes. In the 2013 taper tantrum, real yields rose 140 basis points in four months, triggered an emerging market shock, and ended the idea of QE forever. In 2022, real yields rose 360 basis points in under a year and upended traditional 60/40 portfolios.

Because we expect any hikes to prove modest, and given the starting point, we do not expect a real yield move on the scale of past episodes. Today’s real yield environment reduces the need for another valuation reset. But with five-year inflation breakevens sitting at 2.21%, we don’t believe investors are being adequately compensated for current inflation risks.

Bottom line: While markets may react nervously to any shift toward tighter policy, much of the rate repricing that drove prior bouts of volatility has already occurred. The bigger risk, in our view, is that inflation expectations remain too subdued, leaving investors inadequately compensated if inflation proves more persistent than markets currently anticipate.