Central banks and forecasters globally are raising inflation projections for 2026 as energy disruptions from the Iran war push prices higher. The stagflation scenario is becoming the consensus outlook.
The Forecast Revisions
Inflation forecasters worldwide are raising expectations. The ECB, Fed, Bank of England, and numerous private forecasters are all revising inflation upward. Energy prices are the driver—as they remain elevated, inflation persists.
The question is how much inflation is temporary (energy-driven) versus persistent (wage-driven). If energy prices stabilize at high levels but don't continue rising, inflation might moderate. If energy shocks trigger wage spirals, inflation could accelerate further.
The Central Bank Dilemma
Higher inflation projections create pressure on central banks to tighten policy. But tightening into a growth crisis risks recession. Central banks are trying to thread a needle: fight inflation without crushing growth.
This is an impossible task. Eventually, they'll have to choose: price stability or growth. The choice will determine whether the economy faces sustained high inflation or recession.
The Investment Environment
In a stagflation scenario, traditional investments underperform. Bonds suffer from rising rates. Stocks suffer from slowing growth and margin pressure. Commodities do well, but they're a minority of most portfolios.
Investors are preparing for a difficult environment.