Introduction to Inflation Squeeze
The concept of an inflation squeeze refers to a situation where the economy is experiencing high inflation, which can lead to a decrease in the purchasing power of consumers. This, in turn, can affect the overall economic growth and stability. Recently, there has been a pivot in the economic landscape, making 2026 look less predictable and more like a complex decision-making process.
Why Should You Care?
The upcoming year may bring significant changes to the economy, and it’s essential to understand why these changes matter.
For Markets
2026 may not be a straightforward bet on lower interest rates. Some major banks are already suggesting that interest rate hikes might return in 2026 if inflation remains high and labor markets stay strong. This is crucial because higher interest rates for an extended period tend to favor investments with stable cash flows and negatively impact long-term bets, such as expensive growth stocks, real estate, and highly leveraged borrowers. The idea that interest rates will only decrease, which boosted risk assets this year, could be challenged soon.
The Bigger Picture
Emerging markets are cutting interest rates faster and earlier than wealthy economies. These markets didn’t just follow the lead of the G10 economies; they actually outpaced them, with roughly 3,085 basis points of cuts across 51 moves in 2025. Policymakers in several developing economies managed to keep inflation under control by tightening their monetary policies earlier, which allowed them to ease their policies sooner. The difference in interest rates matters for currencies and capital flows: larger rate drops can weaken exchange rates, but cheaper local borrowing can also support growth as the US and Europe experience slower economic growth.
Conclusion
In conclusion, the economic landscape is becoming increasingly complex, and 2026 is shaping up to be a year of significant changes. The potential for interest rate hikes, the differences in economic policies between emerging and wealthy economies, and the impact on markets and currencies all contribute to a highly unpredictable environment. Understanding these factors is crucial for making informed decisions, whether you’re an investor, a consumer, or simply someone interested in the economy. As the situation continues to evolve, it’s essential to stay informed and adapt to the changing circumstances.
