Energy Spikes and Rate Hikes Push Global Economies Toward Stagflation

Rising energy costs and global borrowing rates are pushing world economies toward stagflation, a condition of high inflation paired with slow growth. Oil futures have surpassed US$100 per barrel, while diesel and jet fuel prices have surged. European natural gas has reached its highest levels since 2022, contributing to rising August inflation figures across the United Kingdom, the Euro zone, and the United States.

In response, the Federal Reserve System implemented a 25-basis-point rate increase. Markets now anticipate further hikes from the Bank of Japan, which is expected to raise rates to a 31-year high, and the European Central Bank, which has increased its inflation expectations for next year to an average of 2.5 per cent. The Bank of England left rates unchanged but forecast that inflation will top 4 per cent by early 2027.

While AI-driven spending has maintained corporate earnings and stock market resilience, increasing mortgage rates and fuel costs are squeezing consumers. This pressure has led to a decline in consumer discretionary stocks in both Europe and the United States. Chris Jeffery, head of macro strategy at Legal & General Investment Management Limited, warned that these rising costs may begin producing negative equity and credit effects.