Invesco uncommon truths should we be worried about inflation august 2026

Uncommon truths Should we be worried about inflation?

Markets appear to have lost faith in the Fed’s desire will come in October or December (versus September to fight inflation. Globally, inflation remains above prior to the meeting). target but there is no clear trend. However, cyclical forces could push it higher over the coming years. On that basis, the market seems to fear the Fed is behind the inflation curve. Is that fair? First, it is worth Three major central banks met last week. They all noting that the median forecast of FOMC members remained on hold, as expected, but market reactions suggests the Fed’s neutral policy rate is around 3.1%, varied. The BOJ announced what my Tokyo colleague implying that FOMC members believe the current policy (Tomo Kinoshita) described as a hawkish hold at rate (3.50%-3.75%) is restrictive. To believe the Fed is 1.00% and the Bloomberg market implied path of BOJ behind the curve, you would need to believe the Fed’s rates ticked up (Tomo now favours a hike in October). neutral policy rate is higher than the FOMC suggests. Just as important, the yen strengthened the day before Personally, I think the neutral rate is in the 3.50%- the meeting, with a suspicion of intervention, which 4.00% range (based on the assumption that inflation could be interpreted as a sign of tightening. will be 2.00% and that economic growth will be 1.50%- 2.00% over the long term). On that basis, I would say The BOE decision to hold at 3.75% was the result of a that Fed policy is neutral. 6-3 vote, with three members of the MPC (Monetary Policy Committee) voting to hike (two of those three The second way in which the Fed could be behind the had voted for a hike at the previous meeting). MPC curve is if inflation is above target and is on an upward member statements suggested a split between those trajectory. With June headline CPI and PCE inflation believing it would be prudent to hike in the face of rates of 3.5% and 3.7%, respectively, US inflation volatile energy prices and those emphasising the belief remains above the Fed’s 2% target. The Fed’s that policy is already restrictive and that domestic favoured measure of inflation, core PCE, was 3.3% in inflation pressures are easing, which could allow further June, and core CPI was 2.6%. So, the starting point for easing if energy prices stabilise. Market reaction was Kevin Warsh is an inflation rate that remains above muted, with little change in the implied path of BOE target, though the trimmed mean PCE measure, that he rates (a hike is expected in November or December). has advocated, is closer to target at 2.2%.

The Fed meeting had the biggest impact. The decision As for the trend there is a cyclical element, as to hold at 3.50%-3.75% appears to have been suggested by Figure 1. During recession, supply of interpreted by markets as a dovish hold, despite the goods & services may exceed supply, thus depressing fact that three members of the FOMC voted for a rate prices. In the labour market, rising unemployment is hike (versus none at the previous meeting). Treasury associated with falling wage inflation. Once the yields jumped, with all of the movement focused on the economy recovers, demand and supply should move inflation component (the rise in the 10-year yield was into better balance and inflation stabilise, until, in the almost equal to the rise in the breakeven inflation rate). later stages of the cycle, demand outstrips supply and The market implied path of Fed policy rates is now price inflation rises. As the cycle advances, the jobless lower than it was, with the suggestion that the first hike rate is likely to fall, driving wage growth higher.

Figure 1 – US wage inflation is cyclical (the Phillips Curve works!)

Note: Based on monthly data from January 1985 to June 2026. Source: LSEG Datastream and Invesco Strategy & Insights 02 August 2026 For professional/institutional/qualified/accredited investors only 1

The current economic upswing started in most the $120 seen in March and April. To provoke a countries in the middle of 2020. It is now six years old durable uplift in inflation, I believe the oil price would and already longer than that of…