2026 Annual Inflation Indicators Survey | Linchpin

This is Linchpin’s fourteenth annual update, in which we monitor a range of inflation indicators.  The aim is to provide investors with a framework for assessing long-term inflation.  Last year, we said that monetary debasement in the longer term remains the major risk.  12 months later we can no longer see how central banks or the bond vigilantes might wrest control back from governments.  We therefore believe higher and persistent inflation is inevitable.  Investors need to consider their positioning in this environment.

William Bourne                                                                                                                                        31^st December 2025

LINCHPIN INFLATION INDICATORS

Governments are printing money again

Last year we commented that the dial had moved further towards inflation.  Events this year have resulted in another move, with seven out of our 12 indicators now pointing to inflation and only one, the anaemic level of economic growth, to deflation.  Inflationary pressure is coming from multiple areas, with market, policy action, and demand indicators all pointing in the same direction.  Only the supply side indicators are more balanced.

Central banks have continued to cut rates despite inflation in much of the world remaining well above the targeted 2%.  Markets have unsurprisingly concluded that they are tacitly happy to accept a higher level.  The fact that the next Governor of the Fed., when appointed in January, is likely to be closer to Trump can only add more fuel to this fire.  We note in mitigation that China and Japan, for very different reasons, are following different paths.  China is aiming to avoid a devaluation of its currency, while the Bank of Japan is slowly starting to normalise rates by raising them.  China might change tack, Japan will not.

Monetary debasement has been a constant theme of these reports and has been the driver behind our long-term inflation expectations throughout the fourteen years of this survey.  That has not changed, with the U.S. increasingly turning to short-term funding to finance its primary deficit and refinance its growing debt pile.  This is not the same Quantitative Easing (QE) policy as 2008-2020 as it is being led by the U.S. Treasury, not the Fed.  But it is QE in another form, and the ultimate outcome will be the debasement of paper currencies.

This policy also suppresses US Treasury yields by reducing supply.  A comparison with other US Government-backed agency debt suggests they would be about 80bps higher (60bps a year ago, 0bps in 2021) without the new bout of Q.E.  As Treasury yields are used as the risk-free rate, credit risk is being under-priced.

Market indicators are inflationary

Our market side indicators are all pointing to inflation.  Gold takes pride of place, rising in 2025 by over 60% from $2,700 to a peak of $4,500.  This was after a 30% rise in 2024.  There are multiple factors behind the surge in the gold price, but an inevitable conclusion is that investors are showing a preference for gold over fiat currencies.  Interestingly, bitcoins and other similar crypto-currencies have not followed the same path.

Bond yields went higher again during the year, and are now above 5% for all maturities longer than 17 years in the U.K.  Break-even inflation rates (i.e., the difference between conventional and index linked gilts of the same maturity) are at 3% in the U.K. and 2.2% in the U.S. (at the 10-year tenor).  Some of this may be explained by the suppression of bond yields in the U.S rather than an expectation of higher inflation in the U.K. compared to the U.S.

Supply-side indicators

Last year we commented that supply-side pressures had moved towards disinflation, with falling producer prices in China and lower energy prices.  These two themes remain in place:  there is a glut of energy as renewables come on stream at the same time as more oil also comes to the market;  and Chinese producer prices have now been in a deflationary trend for over three years.  As the world’s manufacturing base, this is important.

The big supply-side change in 2025 was the U.S.’s imposition of higher tariffs on most countries in the world.  Ultimately these will have to be paid for by the private sector, whether consumers or producers.  In the longer-term more goods will be on-shored for political reasons.  All this is likely to be inflationary.  Tariffs have had secondary impacts too, with businesses and consumers delaying purchase decisions.  In the immediate future, this may well be deflationary, but not for ever.

Commodities have again been a mixed bag.  Oil and gas prices have fallen as renewable energy comes on stream, and Trump’s policies have targeted lower energy prices.  Among other commodities, copper and nickel have been the big stand-outs on the inflationary side, whereas food commodities such as rice and cocoa fell by nearly 50% in 2025.

In theory, apart from possibly the U.S., the large economies have been growing more slowly than they should, and a substantial output gap exists.  However, the over-capacity has likely been taken out by changing technology, and tariffs have not helped – viz the lines of unsold Chinese electric vehicles stranded at European ports. AI may radically affect the supply-side in the future by disintermediating workers and cutting costs.  On the other hand, the shrinking supply of workers may counter-act this to some extent.  

Balancing these conflicting pressures, we have left all three supply-side indicators at neutral. 

Governments will drive new spending

The demand side is mixed, with government spending on the rise but private consumers more cautious.  Governments across the world continue to embrace fiscal expansion for many reasons, ranging from increased military spending to an inability to tighten because of political feebleness.  The big unknown is how Trump’s fiscal programme will land.  His current powerbase is likely to erode at 2026’s mid-term elections, and he may or may not be able to push through further tax or spending cuts before then.  We remind readers that governments tend to be less price-conscious than private individuals or entities, making inflation more likely.

As we commented last year, government spending should be self-limiting because the cost of borrowing (i.e., bond yields) becomes prohibitive.  However, in a more autocratic world it is less certain than it used to be that the ‘bond vigilantes’ still have the power to stop governments.  The suppression of bond yields in both the U.S. and Japan is evidence of that.

We have moved leverage to neutral, partly because credit is under-pricing risk as discussed above, and partly because credit spreads have come in, making it cheaper to borrow.  We accept this might go in the other direction if something occurs to make borrowing less available.

The real danger remains monetary debasement in the longer term

We said a year ago that our real concern was not the short-term, but what happens in five to ten years’ time.  The U.S. has now provided other countries with a template to print money in order to fund their spending, and rising debt service costs make it less attractive to finance through long-term bonds.  With the U.S. template in front of them, it seems close to inevitable that more governments will end up going to the ‘magic money-tree’.

To make it worse, none of the tail-winds of the past eighty years which helped them keep debt levels under control are in place: stronger growth (1960s), lower debt levels (1970s through to the 2000s) or low interest rates (2008-2022).  The combination of this with the reducing ability of central banks or bond markets to hold governments to account is why we believe monetary debasement is now almost inevitable.  The question for investors is how best to position themselves to protect the value of their assets.

If you would like to discuss anything in this article, please contact us on research@linchpin-advisory.com.