The inflation regime that doesn't fade?

The closure of the Strait of Hormuz is increasingly revealing a familiar pattern: the building blocks of a global stagflationary shock are falling into place. Upstream inflation pressures are strong, but downstream pass-through to consumer prices more limited so far, with core inflation still contained. Crucially, weaker demand and cooling labour markets may restrain a full inflation spiral. Markets are nevertheless pricing more persistent inflation, pushing bond yields higher. Policymakers face a delicate trade-off: avoiding policy mistakes while maintaining credibility. Limited fiscal space and cautious G7 coordination suggest restrained responses, raising the risk of fragile stagflation if geopolitical disruptions persist.