What a week to write! In the span of four trading days, the U.S. held its midterm elections, the S&P 500 had one of its best post-midterm days, oil had its biggest one-day drop since April, and technology stocks had their worst day since the pandemic. In the middle of it all, the Bank of England raised interest rates, a week after the Bank of Canada did the same. There’s a term for showing up when the party is already in full swing: fashionably late.

Over the past few months, central banks around the world have raised interest rates almost in unison in response to rising prices:

• Federal Reserve: rose to 3.75% to 4% in September, its first hike since 2023. Markets expect another in December.
• Bank of Canada: rose to 2.5% on October 28, also its first increase since 2023.
• Bank of England: rose to 4% on November 5, its first hike in more than three years.
• European Central Bank and Bank of Japan: both raised rates in June and again in September, to 2.5% and 1.25% respectively and signaled that December could bring another hike.

Inflation worries this year have rested on two pillars. The first is the Iran conflict, which pushed energy prices higher. The second is the AI building boom which has driven extraordinary demand for chips, electricity, land and construction crews. The midterm elections put both pillars in question in a single week.

• Oil: Investors are betting that a Democratic Congress could add pressure to wind down the conflict.
• AI: After democrats won in several key data center states, investors are worried that tougher regulation and slower approvals for new data centers could impact growth.
• Bonds: Yield also fell as investors expect a divided government could mean less deficit spending.

Each of those moves carries the same message: inflation is about to fade, and central banks can soon stand down. Markets may turn out to be right. But they are pricing an outcome that hasn’t happened yet.

We think markets are leaving the party too soon.

Firstly, oil is priced for a peace deal that hasn’t been signed. Prices have fallen on hope more than anything. U.S. diesel inventories are at their lowest level since 2003, and the emergency reserves governments released this year will need to be refilled. Buying back those barrels adds demand, not supply.

Secondly, inflation has had time to travel. An energy shock that lasts a few weeks shows up at the pump. One that lasts eight months seeps into shipping contracts, food prices and wage negotiations. As we wrote in September, higher diesel and fertilizer costs, along with a strengthening El Niño, could keep pressure on food prices well into 2027.

Lastly, a divided Congress may limit new deficit spending, but governments are still borrowing heavily. France is the reminder: its 10-year bonds yield about 1.5% more than Germany’s as investors demand to be paid for fiscal risk.

What We Expect from Here

Central banks have a hard job. They make decisions today, using data from last quarter, about an economy that will look different next year. Markets have the opposite habit. They tend to celebrate the end of a problem before the problem has ended. Last week, a single election moved oil, chip stocks, bonds and gold within days, and the first reaction is rarely the final one.

We expect inflation to remain sticky. How central banks respond is less certain. They may keep raising rates, or, with governments carrying heavy debts, they may let inflation run a hot. Either way, that’s an environment where owning things that are physical and scarce tends to help. Real estate whose rents reset over time, infrastructure with contracts tied to inflation, and commodities and gold, whose prices are often the inflation itself

Central banks arrived fashionably late and markets are already reaching for their coats, but we’d hold off on goodbyes. Inflation has a way of overstaying its welcome.