February 20, 2026

The New Regime: Inflation Volatility, Not Inflation Itself

For much of the last decade, investors operated in a fairly familiar world: inflation was low, interest rates were lower, and the dominant challenge was often not volatility, but complacency. Markets wobbled from time to time, but the underlying backdrop was broadly stable.

That world has changed.

Even as headline inflation cools from the post-pandemic surge, the defining feature of this decade may not be “high inflation forever”. It may be something subtler, and more important for portfolio outcomes:

Inflation volatility.

In other words, the path matters more than the number.

Inflation can fall, yet still feel unstable

When we talk about inflation, it’s tempting to focus on a single figure: CPI is 3%, 2% or 4%. But markets don’t respond to levels in isolation. They respond to how inflation behaves through time:

Does it move smoothly or in jolts?
Is it broad-based or concentrated in a few items?
Is it predictable, or repeatedly surprising?
Does it respond quickly to tighter policy, or does it linger?

A world where inflation averages 2–3% but swings unpredictably is very different from one where inflation sits calmly at 2% year after year.

Why the old playbook is less reliable

The 2010s were disinflationary and, crucially, stable. Global supply chains were abundant, energy was relatively dependable, and central banks had room to be supportive with a clearer reaction function.

The 2020s are different. Several structural realities have become more binding at the same time:

Geopolitics and supply-chain resilience: efficiency is being traded for security. Redundancy reduces vulnerability, but can raise the chance of intermittent bottlenecks.
Energy security and electrification: the energy system is being rebuilt in real time. That is an enormous capital programme, and transitions rarely run smoothly.
Labour constraints in domestic services: wage-driven inflation can prove stickier, even as goods prices cool.
More frequent real-economy shocks: weather, shipping disruptions, commodity supply issues and geopolitics have reasserted themselves as drivers of inflation surprises.

None of this guarantees permanently high inflation. But it does increase the likelihood that inflation outcomes will be less smooth, more episodic, and more prone to upside and downside surprises.

Why inflation volatility matters for markets

Inflation volatility has three practical effects that show up repeatedly in markets:

1) It increases interest-rate volatility
When inflation surprises, central banks have a harder job. Markets swing between pricing faster cuts and fearing renewed tightening. That uncertainty often expresses itself first in bonds, and then feeds into equities through the discount rate.

2) It compresses valuation certainty
If the discount rate is unstable, it’s harder to assign a stable present value to future cashflows. That doesn’t mean equities can’t do well, but it does mean valuations become more sensitive to macro surprises.

3) It raises dispersion (winners and losers)
When inflation is stable, broad market exposure can be enough. When inflation is volatile, pricing power and cost structures matter more. Some businesses can pass on costs without damaging demand; others can’t. The same applies across sectors and regions.

Higher dispersion can feel uncomfortable , but it also creates opportunity for disciplined portfolio construction.

A better set of questions

Rather than asking “Will inflation be 2% or 3%?”, the more useful questions are:

Breadth: is inflation broadening or narrowing?
Persistence: is the stickiest component (often services) cooling steadily?
Sensitivity: do pressures respond to policy tightening, or persist despite it?
Shock risk: how exposed are we to energy, food, freight or geopolitical shocks?
Expectations: are households and businesses behaving as if inflation is stable, or not?

These are the variables that tend to drive the rate path, and the rate path is often what drives market multiples.

What this means for investors

In a world of higher inflation volatility, the goal is not to predict every twist in the data. The goal is to build portfolios that can withstand a range of plausible outcomes.

A few high-level principles follow:

Resilience beats precision: diversification and balance matter more when the path is uncertain.
Pricing power matters more: robust margins and strong balance sheets tend to help in choppier inflation regimes.
Expect rotation: higher macro volatility typically increases the probability of leadership changes across sectors and regions.

These are structural considerations, not short-term market calls, and they shape how we think about risk over multi-year horizons.

Looking ahead

The most important takeaway is simple:

The near-term can feel inflationary even as longer-term disinflationary forces begin to build.

Short-term constraints and transition costs can keep inflation outcomes choppy and policy uncertain. Over time, investment in productive capacity – including technology-led efficiency – can prove disinflationary.

We’ll return to this theme in our forthcoming quarterly outlook, where we will connect these strands into a single framework. In April, we plan to publish that framework as a two-part series:

“Inflationary now, deflationary later.”

If you would like to discuss how these themes may affect your own investments or financial planning, please contact us to arrange a conversation with one of our advisers.

This article is for information only and does not constitute personal advice or a recommendation to buy or sell any security, fund or index. The value of investments can go down as well as up, and you may get back less than you invest. Past performance is not a guide to future returns. If you are unsure as to the suitability of any investment, please seek advice that takes your personal circumstances into account.