The Most Fundamental Macro Risk Is Back

The Most Fundamental Macro Risk Is Back

BY TYLER DURDEN THURSDAY, JUL 23, 2026 - 03:10 PM Authored by Simon White, Bloomberg macro strategist, Rising inflation volatility is set to trigger earnings disappointments, wider credit spreads and more variability in stock and bond prices. Inflation is on the cusp of reigniting, as the incessant conflict in the Middle East takes oil prices back towards $100. That’s not good news, but more troubling for markets is that the volatility of inflation is also sharply rising again. It is the ultimate macro risk, as everything – goods prices, borrowing rates, Federal Reserve policy and cash flows – becomes more uncertain when the purchasing power of money itself becomes unstable. Higher inflation alone is pernicious for the performance of risk assets. But the increase in the variability of CPI prints, which last month’s lower-than-expected outturn exemplifies, allows counter-narratives to persist that the inflation regime is ending. That adds to market volatility and drives up risk premia. The pick-up in inflation vol is becoming increasingly apparent at the top level, but it is unmistakable under the surface. The average volatility across US CPI components is close to revisiting the highs of the pandemic price surge.

The impact of inflation volatility on consumption is well documented. The Katona effect, named after the behavioural economist George Katona, describes how consumers postpone expenditures when inflation and its volatility rise. But there is no similar well-defined neologism for inflation volatility’s effect on markets. There should be though, as it is every bit as important. The combination of growing price pressures – with their leeching effect on market-supporting liquidity – and the increased uncertainty of higher inflation vol are toxic for risk premia. The two often go together: inflation exhibits heteroskedasticity, ie its variance rises as it increases. That’s clear as day if we split US CPI into deciles, with the highest decile having by far the largest inflation volatility on average.