By Daniela Hathorn, senior market analyst at Capital.com
Markets are trading cautiously following the latest US CPI report, which reinforced concerns that inflationary pressures linked to the ongoing Middle East conflict are becoming more deeply embedded in the global economy. US inflation accelerated sharply, with headline CPI rising to 3.8% year-on-year — the highest reading since 2023 — driven largely by surging energy costs as disruption through the Strait of Hormuz continues to pressure oil and gasoline prices higher. The immediate market reaction was broadly risk-off, with equities dipping and yields moving higher following the release, reflecting expectations that the Federal Reserve may be forced to maintain restrictive policy for longer than previously anticipated. Markets have also begun increasing the probability of a potential rate hike later in 2026, particularly as core inflation measures also showed signs of firming.
Energy markets remain central to the story. Oil prices continued to rise with Brent and WTI crude extending gains amid ongoing concerns over supply disruptions and shipping risks in the Gulf. Higher energy prices are now feeding directly into inflation expectations, creating fears of a stagflationary backdrop where inflation rises even as economic growth begins to soften. This dynamic has become especially problematic for central banks, which now face the difficult balancing act of containing inflation without exacerbating downside risks to the labour market and broader economy.
