In the U.S. and Europe, underlying inflation has stopped falling or edged higher recently, weakening the case for rate cuts
4 min
Inflation is proving stickier than expected in the U.S. and Europe, creating a headache for central bankers and sowing doubts on whether investors are too optimistic about the world economy.
The decline in inflation from highs of around 9% to 10% across advanced economies in 2022 represent the easy gains, as supply-chain blockages eased and commodity prices, especially for energy, normalised.
The “last mile” is proving tougher . Underlying inflation, which excludes volatile food and energy prices, slowed to 3% in the second half of last year across advanced economies but has since moved up to 3.5%, according to JP Morgan estimates.
That is forcing investors to rethink bets that inflation would steadily decline to central banks’ targets, generally around 2%. There are even concerns it could surge again, mirroring the second wave that characterised the high inflation of the 1970s.
Economists’ and central banks’ forecasts of sustained falling inflation depend on “strong gravitational forces that are not yet validated in global labor costs, short-term expectations, or in recent signals from commodity markets,” JP Morgan wrote in a note. Services inflation remains elevated while goods prices, which had fallen last year, are now moving higher, it noted.
Central bankers say they expected the last mile of falling inflation to be bumpy. Yet they are also signaling their willingness to wait before cutting interest rates. Fewer, or no, rate cuts would have sweeping repercussions for the global economy and markets, whose recent rally began after a narrow majority of Federal Reserve officials recently reaffirmed projections to cut interest rates three times this year.
On Friday, the U.S. Commerce Department reported that the price index of personal-consumption expenditures, the Fed’s preferred indicator of inflation, rose a relatively tame 2.5% in the 12 months through February, up modestly from 2.4% in January. Beneath the surface, the trend was less comforting. The index excluding food and energy climbed by 3.5% on an annualised basis in the three months through February, up from around 2% late last year.
“These shorter-term inflation measures are now telling me that progress has slowed and may have stalled,” Fed governor Christopher Waller said in a speech Thursday, before the latest inflation data.
“In my view, it is appropriate to reduce the overall number of rate cuts or push them further into the future,” Waller said.
Fed Chair Jerome Powell struck a more balanced note Friday, saying inflation is on a sometimes bumpy path toward 2%, and strong economic growth allows policymakers to wait. “Is progress on inflation going to slow for more than two months?…We’re just going to have to let the data tell us that,” Powell said in an interview at the San Francisco Fed.
Joachim Nagel , president of Germany’s Bundesbank and a member of the European Central Bank’s rate-setting committee said in late February that underlying inflation in the eurozone was still 2 percentage points higher than its 1999 to 2019 average.
“If we reduce interest rates too early or too sharply, we run the risk of missing our target,” and might need to raise interest rates again, he said. He highlighted a recent International Monetary Fund report that found four out of every 10 inflation shocks since the 1970s had yet to be overcome even after five years.
In Italy, underlying inflation climbed to 2.4% in March from 2.3% the previous month, according to data published Friday. French headline inflation cooled to 2.3% in March, but services prices remained sticky, rising by 3% from a year earlier.
Why is inflation proving stubborn?
Despite the sharp interest-rate increases of the past two years, economic growth is resilient, especially in the U.S. The Atlanta Fed said Friday its real-time indicator of first quarter U.S. economic growth ticked up to 2.3% from 2.1%. Consumer spending, adjusted for inflation, increased by around 5% on an annual basis in February, the Commerce Department said.
“The unexpected strength of real consumption” means “there is still no rush to cut interest rates,” said Paul Ashworth , an economist with Capital Economics.
While Europe’s growth has stalled since late 2022, recent business surveys suggest the outlook is brightening. Meanwhile, job creation has been strong on both sides of the Atlantic, and wage growth remains high, partly reflecting tight labor markets. Wages are an important input to services-price inflation in the eurozone, which has been running at a 4% annual rate since November.
March inflation data for the entire eurozone will be published on Wednesday. ECB officials have indicated they could start to cut interest rates in June from the current 4% level, while the subsequent pace of cuts after that is unclear.
Central banks themselves may be inadvertently adding to inflation pressure. By signaling a pivot toward interest-rate cuts last fall, they pushed global borrowing costs down and asset prices up, supporting spending.
Some factors favour inflation declining further. In both the U.S. and Europe, a surge of immigration could help keep a lid on wage increases.
The U.S.—but not Europe—is also seeing big increases in productivity, that is output per worker, which helps to offset high wage growth. It is unclear, however, how long that will last. The pandemic might have changed how Americans work and use technology, but “once we have made those changes, they’re done, so I don’t see this as a driver of sustained productivity growth,” the Fed’s Waller said.
Meanwhile, oil prices have risen recently, which could push up headline inflation.
To offset a slumping property market, China has dramatically boosted manufacturing capacity and exports, which have weighed on global goods inflation. But its export prices have recently started to increase, according to JP Morgan.
If central banks react to stubborn inflation by backing away from rate cuts, that would put pressure on both heavily indebted governments and employers. That could test central banks’ will to finish the last mile and push inflation all the way to target.
Higher government spending on defence and green energy, and geopolitical tensions that crimp global trade, are likely to pressure central banks to tolerate higher inflation over the coming years, according to a Brookings Institution paper published in March.
“A strengthening of central bank independence combined with a more credible public debt policy is likely needed,” said the paper, by economist Kenneth Rogoff of Harvard University and three co-authors.
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Gold miners are emerging as a compelling way to navigate market uncertainty, with analysts pointing to strong cash flows, attractive valuations and rising profit margins. As gold prices stabilize above US$4,000 an ounce, mining stocks could offer investors both downside protection and long-term upside.
3 min
Gold is one of the market’s go-to hedges in rocky times. Don’t forget that gold miners’ stocks are too.
The stock market’s gains in 2026 belie the rocky macroeconomic picture: elevated inflation, heightened geopolitical tensions, and jitters about the artificial-intelligence trade. That backdrop, in theory, should be the time for gold to shine. Instead, the price of the yellow metal has tumbled more than 5% so far, after last year’s blistering 65% rally. In part, the U.S. dollar’s recovery has stymied gold, which benefited from the greenback’s weakness in 2025.
Even with the precious metal’s recent weakness, gold mining stocks could be the best way to profit from this year’s uncertainty.
Gold miners “are a valuable hedge against macro risks that would likely be damaging for equities,” BCA Research’s Noah Weisberger and Rishabh Shah wrote this week.
Concerns about the Federal Reserve’s next moves to tackle inflation, the increasingly crowded AI trade, and steep valuations for tech stocks are just some of the drivers that could help gold’s price get on even footing— and lead to even bigger gains for miner stocks.
These stocks’ prices tend to outpace gold’s moves, because the companies have fixed operational costs. So when gold’s price rallies, their profit margins soar, and vice versa. For instance, the VanEck Gold Miners GDX +7.39% exchange-traded fund has fallen 11% this year as the metal has slumped.
Now, gold’s price just needs to stabilize to help miners’ stocks take off, and that seems to be happening. The precious metal has recently found support above the $4,000 level, and has stuck in a narrow range since the end of June. But its price rose ever so slightly in July, ending a four-month losing streak for the metal. Technical analysis also suggests that gold is due for a comeback.
Barron’s recently wrote that the pullbacks for both gold miners and the metal itself are overdone. Senior technical analyst Doug Busch noted that the VanEck ETF is on the “verge of a breakout” and has the potential to hit $11o in early 2027, up more than 40% from its current price.
Gold miners also have more than their role as a market hedge going for them. Their fundamentals are solid, too, says Chris Mancini, portfolio co-manager of the Gabelli Gold Fund.
“Precious metals miners are generating substantial amounts of free cash flow given profit margins of over $2,000 per ounce, and are returning this cash to shareholders through buybacks and dividends,” he said in an email.
“Buying the miners is a cheap way to get exposure to the price of gold,” he added. His fund owns Newmont NEM +6.71%, a Barron’s stock pick last year, and Agnico Eagle Mines as top holdings, as well as miners Northern Star Resources, Endeavour Mining, and Kinross Gold K+8.59%.
Miners are better businesses than they used to be, the BCA team added.
“Capex is more disciplined, margins are high and rising…and they are largely independent of the AI story,” Weisberger, BCA’s head of equities, and Shah, a senior analyst, wrote.
That last part is key. AI is disrupting the software industry and many other services and information-oriented businesses, and investors have piled into AI stocks. But ChatGPT, Claude, Grok, and other large-language models aren’t going to replace the need to mine for metals.
“Equity portfolios can benefit from exposure to quality that is uncorrelated to AI risk, and gold miners fit the bill,” the BCA team said.
They recommend that investors buy the VanEck Gold Miners ETF, which owns top miners such as Agnico, Barrick Mining ABX +7.24%, and Newmont.
An important bonus for big gold miners’ stocks is that their valuations are attractive after the gold’s pullback, too. The VanEck ETF is now trading at just a little more than nine times next year’s earnings estimates. That’s a big discount to its five-year average price-to-earnings ratio of 14, according to FactSet.
What’s more, the ETF is currently valued at a more than 50% discount to the S&P 500 SPX -0.17%, which is trading for about 19 times earnings estimates for 2027. Mining stocks have typically traded at just a 25% discount to the broader market over the past five years. So there is significant upside for the group if valuations move back toward normal levels.
One factor that complicates mining stocks as a market hedge, of course, is if stocks bounce back, which has been the case so far in August.
But both the market and economic outlooks remain cloudy, and investors remain nervous about the Fed’s next moves and AI stocks. Gold miners should do just fine, even if the anxious mood on Wall Street persists.
