THE resurgence of geopolitical conflict in the Middle East and the resulting spike in global energy prices have once again complicated the battle against inflation for major central banks. What initially appeared to be a manageable disinflation trend has evolved into a renewed inflation challenge, forcing policymakers to reconsider the pace and direction of monetary policy while investors reassess portfolio risks and opportunities.

Recent economic data underscore the growing impact of war-driven inflation. Global headline inflation, excluding China and Turkey, is estimated to have risen to roughly 3.5 pre cent year over year in April 2026 — around one percentage point above pre-conflict levels. Even more concerning, the three-month annualised inflation rate has climbed above 6 per cent, signalling accelerating price pressures. While higher fuel and energy costs remain the primary drivers, inflation is increasingly spreading into broader consumer and services categories, raising alarm among policymakers.

The United States offers a clear illustration of these dynamics. US consumer price inflation rose to 3.8 per cent year over year in April, marking its highest reading in three years. Core inflation also exceeded expectations, suggesting that price increases are no longer limited to volatile components. Producer prices painted an equally troubling picture: April’s Producer Price Index rose 6 per cent year over year, the steepest increase since December 2022, and well above market expectation for a 4.9 per cent rise. Energy prices jumped nearly 8 per cent during the month, while transportation and warehousing costs rose sharply, highlighting how supply chain pressures and higher oil prices are permeating the economy.

Central banks are particularly concerned that inflation is no longer confined to energy-related categories. Measures of so called supercore inflation — services excluding housing — have shown renewed momentum, indicating second-round effects as companies pass higher input costs on to consumers. This raises the risk that inflation expectations become entrenched, making price stability far more difficult to restore without tighter financial conditions.

In response, central banks across both developed and emerging markets have adopted a more hawkish stance. The Bank of Japan, historically among the most accommodative institutions, has signalled openness to further interest rate hikes amid concerns about sustained inflation and energy-driven spillovers. Emerging market central banks are acting even more decisively. Countries such as the Philippines and Turkey have already raised rates while others, including Indonesia, are widely expected to tighten policy to stem currency weakness and defend financial stability.

The US Federal Reserve faces one of the most delicate policy trade-offs. While economic growth in the first quarter of 2026 underperformed in relation to expectations, persistent inflation has limited the Fed’s ability to pivot toward meaningful rate cuts. Policymakers increasingly acknowledge that elevated energy prices may keep inflation higher for longer, even if growth continues to moderate. As a result, the Fed appears committed to remaining on hold, with the possibility of renewed tightening if inflation worsens.

For investors, the implications are profound. Interest rate uncertainty is rising just as markets had priced in a broader global easing cycle. Prolonged higher rates introduce volatility across asset classes, particularly for interest-sensitive sectors such as technology, real estate, and highly leveraged firms. In fixed income, renewed inflation expectations heighten duration risk, making shorter maturity securities, floating rate instruments, and inflation-linked bonds more attractive.

At the same time, elevated commodity prices may continue to benefit energy producers, infrastructure assets, and firms with strong pricing power. Historically, geopolitical supply shocks favour commodity exporters while placing pressure on transportation-heavy and consumer discretionary sectors. Currency markets are likely to remain volatile as well, with energy-importing countries facing depreciation risks and tighter policy constraints, while safe assets such as the US dollar and gold remain supported.

Ultimately, war-driven inflation has revived stagflationary risks — slower growth paired with stubborn inflation. For central banks, the challenge lies in containing prices without provoking economic contraction. For investors, the environment reinforces the value of diversification, active risk management, and exposure to assets resilient to prolonged geopolitical and inflationary uncertainty.

Eugene Stanley is vice-president, fixed income & foreign exchange at Sterling Asset Management. Sterling provides financial advice and instruments in US dollars and other hard currencies to the corporate, individual, and institutional investor. Visit our website at www.sterling.com.jm

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BY Eugene Stanley .