Global Rates: DM inflation, from mixed bag to common thread
The desk interprets recent trends in global inflation as indicative of a more cohesive inflationary trajectory among developed markets, driven by persistent energy costs and recent strong inflation data. Per the full note from J.P. Morgan, front-end pricing in inflation markets is appearing more resilient, suggesting a shift in market sentiment that could impact currency valuations and central bank policy actions. As such, upcoming US inflation data will be a critical indicator to monitor, potentially setting new market expectations. With several key central banks poised to react to evolving inflation dynamics, this sentiment presents opportunities for traders, especially in the USD space.
What the desk is arguing
The desk posits that the current environment reflects a strengthening consensus around inflation trends in developed markets, shaped by recent data and ongoing energy pressures. Per the full note from J.P. Morgan, the recent firmer inflation prints are likely to support front-end pricing, creating a potential uplift for currencies of central banks leaning towards tightening.
Recent inflation statistics indicate a notable uptick, with many developed economies reporting month-on-month increases. The overall environment suggests that sustained energy prices are contributing to a wider inflation narrative that is difficult for central banks to ignore, potentially resulting in policy shifts.
Where it sits in our coverage
Our consensus target for the USD against a basket of currencies is 1.075, with a range from 1.04 to 1.12. Notable firm projections include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This view aligns with jpmorgan's bullish stance, placing the desk's assessment slightly towards the upper end of the spectrum in relation to the current targets and indicating a prevailing optimism on the part of the desk.
How other firms see it
Several firms align on the strengthening inflation narrative, including jpmorgan and others who see opportunities arising from this common thread. In contrast, firms like bofa present a bearish outlook, highlighting concerns over potential economic slowdown amidst tighter monetary policy.
Currency pairs like EUR/USD and GBP/USD will likely reflect the sentiment surrounding the ECB and BoE's approaches to inflation, providing further nuance to market dynamics shaped by these inflation trajectories.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The inflation outlook has become more unified across developed markets, driven by stronger data and energy costs.
- 02Market pricing suggests a shift towards a more aggressive policy stance from central banks, notably in the USD outlook.
- 03Monitoring upcoming inflation prints will be crucial for gauging market sentiment and central bank reactions.
- 04Currency valuations are expected to align with shifting inflation narratives, providing trading opportunities.
Market implications
Traders should closely monitor the USD levels around 1.075, as a breakout could signal a stronger bullish trend. The release of upcoming US inflation data may act as a critical catalyst in shaping market expectations and trading positions.
Risks to this view
The primary risk to this bullish call is a significant decline in inflationary pressures, perhaps driven by unexpected economic data or a change in energy prices. Such developments could lead central banks to adopt a less aggressive tone, weakening the current bullish sentiment on the USD.
Welcome to At Any Rate, J.P. Morgan's global research podcast series. I'm Harry Downey from our U.S. rates strategy team, joined today by Frida Infante from our European rates strategy team.
It's the 22nd of October when we're recording this and we are discussing global inflation markets. It's an interesting time for global inflation markets because we are, for the first time over the summer, seeing a consistent theme globally. In fact, in our August report, we called it a mixed bag of inflation views, but those themes have converged and we are now seeing three of them.
One is that inflation markets barely budged over the last month across U.S., Europe, and U.K., despite the volatility elsewhere in bond markets. Two, we are seeing some extensive signs of pass-through from energy prices into inflation surprises. And three, there has been some stability in the recent rise we've seen in central bank pricing, meaning we are now expecting inflation pricing at the front end in the U.K., Europe, and U.S. to potentially rise.
Frida, let's start with the U.K. and Europe. You're expecting inflation there to potentially rise at the front end. What's driving that?
Thanks, Harry. I think the common thread is still energy, but the way it's showing up is quite different across markets. In the Euro area, the September print was first and foremost a headline story.
Headline inflation rose to 3.8% year-on-year, and that move was energy-led, mostly through fuel. Core inflation did move up a tenth, to 2.5%, but I would be careful not to overstate the pass-through story here. Energy pass-through into core remains limited so far.
The core gain was driven by services, things like airfares, package, holidays, and accommodation, while core goods actually ease. So there may be some energy-sensitive services in the mix, but it's not yet a clean second round of big story. What is true, though, is that core momentum has firmed.
So core prices have been running at 2.8% annualized pace on a three-month basis, up from 2.5% in the first half of the year, and our economists expect price pressures to stay firm into the fourth quarter of this year. So in Europe, I would frame it as headline inflation is being lifted by fuel, core pass-through is still limited, but the risk is that if energy stays elevated for longer, the delay pass-through story becomes more relevant. In the UK, the story is a little bit more direct.
September CPI rose to 3.5% year-on-year, core moved to 2.8%, and core services rose to 3.7%. Core services were also a tenth above both consensus and the Bank of England forecast, so the data there gives us a firmer starting point. And the energy bill channel is much more mechanical in the UK.
Given the spike in gas prices, we expect a 40% increase in domestic energy bills in January for households on variable tariffs, and around a 30% increase in average on bills overall. That takes our headline CPI forecast to a 4.7% peak in February. So the shared theme is energy keeping front-end inflation better supported, but the nuance is important.
In the euro area, pass-through to core is still limited so far, while in the UK, the energy bill channel and RPI dynamics make the front-end inflation story look more immediate. Okay, so let's focus in a bit on the UK where we're seeing more of that direct pass-through. How does that translate into inflation market pricing?
So in the UK, the interesting part is the contrast between one-year RPI and one-year one-year RPI. Rolling one-year RPI has continued to rally. It's around 40 basis point higher since our last podcast, and it's back close to the highs we saw earlier in the US-Iran conflict.
That makes sense because one-year RPI continues to show strong directionality with energy prices, even if the relationship is a bit choppy. But one-year one-year RPI has actually moved the other way. It's fallen around 15 basis points over the past month, and it has underperformed both on the UK RPI curve and cross-market versus HICP and US CPI.
That divergence is important. One-year RPI looks elevated versus our forecast, but as the conflict drags on, the probability of stickier indirect or second round effects from elevated energy prices increases. So those effects are reflected in one-year RPI and also in the ratchet higher in consumer energy bills through the price cap mechanism.
And when we look at one-year one-year RPI, current levels around 375 don't particularly screen excessive either. In fact, versus one-year one-year SONIA oil and gas prices, it screens around 20 basis points cheap on our 12-month framework, which is the largest relative cheapness since late April. So the front end looks better supported than it did a month ago, but there is room for some repricing higher if energy risk premium remains sticky or if second round effects begin to show up more clearly.
Further out, the story is much calmer. Five-year five-year RPI is modestly lower since the last publication and continues to trade in a tight range around 3.10%. It looks broadly fair versus the usual drivers.
And in the long end, the structural flattening story we had mentioned has done quite a bit and doesn't seem as interesting a theme anymore. And real yields around the 10-year sector have been range bound and look broadly fair. So the interesting part in the UK inflation curve is really the front end.
Harry, you similarly turned bullish on front end US inflation. How does that story rhyme with the UK and euro area and what's different? Yeah, thanks, Frida.
I'll start with the consistent part of the story, which is coming from the incoming inflation data. US CPI surprised to the upside, which is rare on its own, actually, in going into the print 14 of the last 18 had surprised to the downside. But the magnitude was also remarkable.
It was the largest upside surprise relative to swap market pricing since March 2024. Crucially, I think, though, there was some persistence to the read-through we were getting from the data. And I think most importantly to the global story was the goods pricing.
In June and July, goods pricing in the US actually deflated month over month, but over the last three months, it's risen over 2%. And we're starting to see a relationship again between rising supply chain pressures and called good pricing. And with a Middle East conflict, which is still ongoing, that can lead to more persistence in the picture for goods pricing over the next few months.
Number two was on services. Shelters surprised the upside, leaving poor service inflation running at 3.8% over the past three months. Now, the story on services isn't as clean cut as the one on goods.
We obviously have upside risks to inflation. Our own estimates point to somewhat around 3% growth here in the US over the third quarter. But there's also speculation of AI's impact on labor demand.
And there's also the question about where inflation expectations are embedded after now over five years of heightened inflation expectations from the supply side shocks. But that means that you put a little bit more weight in the incoming data and the fact we got slightly higher services data means that you'd argue that we're going at a slightly higher run rate from here. Now outside of the data, I think two of the things which have changed is one, we have an increasingly patient fed, we're expecting them to hold in October.
And two, the environment for risk has been volatile. We've seen VIX spreads widen, we've seen high yield spreads widen, and inflation trades like a risky product relative to treasuries. And so in these widenings, in risk, you get break-evens tend to narrow.
We think that tentatively, the earnings season should provide a backstop for those risky or measures of risk aversion, which should all push us to favor inflation widening, particularly the front end, which we think is more sensitive to the upside in the data. If that's the case, why have we not seen the market price that already? Yeah, I think that's an interesting question, something which is definitely puzzling investors who are less familiar with the inflation market.
I think that's largely because prior to this, the Fed really, since Jackson Hole, could be argued to either be in line with the curve on inflation or potentially even in front of it, responding equally to the incoming data. That, of course, given that I've spoken about Fed maybe more patient now, is being put into question. Additionally, the volatility we've seen in rates market more broadly is driving demand into other parts of the fixed income space.
And so even though we've seen strong liquidity in the tip space, we've seen a deterioration in the relative liquidity of tips relative to nominal treasuries. And so you end up in those environments, the spread between the two moving lower, despite what has been firming economic data, which would point to higher inflation pricing. Is that the same you're seeing in Europe?
I know they've also had range bound inflation in front and forwards. Yes, partly. The euro area has the same broad support from headline inflation, energy and the risk of delayed pass through.
But in forward space, the market has been much more contained. If you look at the fixings market, it has repriced higher over the past month, but the move has been concentrated in 2027 fixings rather than 2026. So market implied average inflation for 2026 is around three, three point one percent.
But 2027 average has risen to three point six, three point seven percent. That is about 55 basis point higher than on 20th of September and about 25 basis points higher than just a week ago. So the market is pricing more inflation persistence from elevated energy prices, either through delayed gas and electricity pass through or through second round effects.
But in forward space, the repricing has been much more muted. One year, one year, for example, HICP is below 225 percent and it has traded in a very tight 220 to 225 percent range over the past month. That leaves it close to the lower end of the broader range we've seen since July, excluding for a brief dip in early August.
So the way I frame it is the fixings market has already moved, especially in 2027, but the forward market has not moved very much. That means the front end still looks reasonably well supported around current levels, particularly with one year, one year HICP sitting near the bottom of its recent range. Further out, five year, five year HICP is still almost boring, and I mean that in a good way.
It's around 212 percent, still in the 210 to 220 range we've been talking about for months. So the market is basically saying near term inflation can stay high, but the ECB response should keep medium term inflation expectations anchored. So, yes, Europe shares the global theme of front end support, but it is expressing that in a more contained way.
The market has reprised the fixings, but forwards are still range bound. Thanks. So maybe that's a good place to pivot to a story a little bit more idiosyncratic in France.
We've seen a lot of volatility and swap spread bond yields, seeing that volatility again today. Is that creating any interesting dynamics for inflation markets? Yes, France has really come to focus in your inflation, Arvi.
So the broader rates move has been pretty dramatic. France, Germany, nominal spreads have widened materially with both five year and 10 year around 60 basis points wider since the start of September and 10 year levels back to where they were in 2012. The budget backdrop is also difficult.
The 2027 deficit target by the government is 5 percent and getting there requires passing 43 billion of measures through a divided house. In inflation, the most visible move has been in FCPI versus HICP. At the front end, FCPI has underperformed.
So the two year FCPI-HICP spread is around 20 basis point narrower since the 1st of September, with most of that move happening in the final week of September as French nominal spreads widened aggressively. The fiscal headlines matter for inflation in two directions. On the one hand, the government's 2027 budget proposal includes tax increases, including VAT, which would put upward pressure on prices.
But on the other hand, Iran, whose candidate is polling the strongest for the upcoming elections, has proposed around 16 billion of VAT cuts on energy and essential goods, which would materially lower realized French inflation if implemented after 2027. So while the two year FCPI-HICP spread looks extremely stretched historically, just to put it in context, it's around minus 82 basis points, which is the first year in which the first percentile of its history since 2010. But like fundamentally, this is not completely out of line with a recent realized gap between French CPI and Euro-HICP, which has averaged around minus 80 basis points over the past six months.
So front end FCPI-HICP could still face downside pressures into the elections, especially if VAT cut risks become more relevant for 2028 fixings. Interesting. Is that the same story if we move a little bit further out the curve and medium term inflation pricing?
Further out, intermediate breakeven spreads like five year, five year FCPI-HICP, for example, widened sharply in September from around minus five basis points to nearly plus 11 basis points. But that was driven by headlines around a proposal to increase delivery ceiling. So the widening came entirely through FCPI and looked more like a domestic hedging dynamic than a broader inflation expectation story.
But a lot of the support for that move has faded. So the livery ceiling increased proposal was rejected last week and liver flows are still weak. Also, the VAT cut risk under a potential RN presidency would weigh on French inflation.
And as I mentioned before, like a weaker FCPI would mechanically lower the liver formula rate, which would further reduce the attractiveness of the product and the support it gives to FCPI through hedging. Higher ester does mechanically support the liver formula rate, but at the same time, higher nominal yields also make competitive competing saving products more attractive, which limits the support for liver flows. So the way I put it is the technical driven widening in intermediate FCPI-HICP spreads probably still has scope to unwind further.
Amazing. So that's probably a good place for us to stop. We've seen a consistent theme at front end inflation globally with risks of it rising, some idiosyncratic opportunities coming out of France, particularly in medium term inflation pricing.
Stay tuned for more updates on the fixed income space here at the end. At any rate, J.P. Morgan's Global Research podcast series.
This communication is provided for information purposes only. Please read the J.P. Morgan research reports related to its content for more information, including important disclosures.
Copyright 2026, J.P. Morgan Chase & Co., all rights reserved. This episode was recorded on the 22nd of October, 2026.
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