Global markets face stagflation fears as energy volatility clouds growth outlook

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Global markets face stagflation fears

Highlights

Oil prices dropped nearly 20% this week to below $100 per barrel but remain up almost 60% year-to-date, while European gas prices have tripled in 2026 due to prolonged supply disruptions from the U.S.-Iran war.
The University of Michigan's U.S. one-year inflation expectations rose to 4.7% in October, with the UN's Food Price Index at a four-year high and major consumer goods companies warning of more price hikes.
U.S. government borrowing costs surged 85 basis points in Q3 and $2 trillion was wiped from Nasdaq 100 market value last month, heightening concerns of stagflation as growth slows and inflation persists.

Energy prices and inflation pressures

As reported by Reuters, investors remain wary that lower oil prices may offer only temporary relief because the Iran war continues to pose risks to global energy supply and inflation. Oil has fallen almost 20% this week to below $100 a barrel, but it is still up almost 60% this year, while natural gas remains nearly three times its level at the start of 2026.

European gas prices have almost tripled in 2026 after surging in March during the U.S.-Iran war and the wider Middle East crisis, which disrupted LNG flows through the Strait of Hormuz, a route that handles around 20% of global supply. The prolonged conflict has pushed prices back to levels last seen during the 2022 energy crisis, reinforcing expectations that central banks may need to raise interest rates further even as growth slows.

The University of Michigan's measure of one-year U.S. inflation expectations edged up to 4.7% in October from 4.6% in September and 3.4% in February. Food prices are also adding to the pressure, with the United Nations Food and Agriculture Organization's Food Price Index at its highest level in nearly four years and major consumer goods and food companies warning of further price increases.

AllianceBernstein chief investment strategist Inigo Fraser Jenkins said geopolitical tensions and supply disruptions are likely to outlast the U.S. midterms, keeping inflation and market volatility elevated. Hank Calenti, global markets strategist at SMBC, said food inflation can also feed broader wage and price pressures through second-round effects.

Borrowing costs and market sentiment

Financial conditions are tightening as government borrowing costs remain sharply higher this year, adding another layer of pressure to the growth outlook. U.S. government borrowing costs surged 85 basis points in the third quarter, while those in France and Italy jumped by more than 100 basis points, and although yields have eased since then they remain elevated.

Demand for safe-haven German bonds could help contain borrowing costs across the euro zone, but a wider spread between French and German debt risks tightening financing conditions even without any change in European Central Bank policy. At the same time, confidence in the AI-driven equity rally is weakening, with major stock indexes still near record highs but investors increasingly focused on the drop in technology shares.

More than $2 trillion was wiped from the Nasdaq 100's market value last month alone, raising concern that further declines could hurt household wealth, lift corporate funding costs and reduce appetite for risk. RJ Gallo, chief investment officer for global fixed income at Federated Hermes, said the term stagflation should be used cautiously because the U.S. economy is still growing at a solid pace and unemployment at 4.2% remains low by historical standards, even as inflation stays the Federal Reserve's main concern.

Our earlier report on the surge in oil shipping costs explained how conflict-linked risks around key routes such as the Strait of Hormuz and the Red Sea have driven tanker and insurance rates sharply higher, making freight a much larger share of the delivered price of crude. It also noted that these transport cost shocks can quickly feed through into gasoline and broader consumer prices, especially in import-dependent markets, while boosting earnings for tanker owners.

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