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Inflation Risks Persist Despite Disinflation

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  Published in Stocks and Investing on Sunday, January 18th 2026 at 10:32 GMT
      Locale: UNITED STATES, IRELAND, JAPAN

1. The Persistent Shadow of Inflation

The significant disinflation experienced since the peak of 2022 hasn't entirely erased the underlying inflationary pressures. While central banks have worked diligently to curb rising prices, the goal of reaching target inflation rates remains elusive. A renewed surge in inflation - potentially triggered by renewed supply chain bottlenecks (perhaps exacerbated by geopolitical instability - see point 2) or persistent wage growth demands - could compel central banks to maintain higher interest rates for a prolonged period. This scenario poses a significant risk to bond markets, where higher rates erode existing bond values. Equities, particularly those reliant on borrowing or sensitive to consumer spending, would also likely experience downward pressure. Investors should consider inflation-protected securities and assets with pricing power as potential hedges.

2. A World in Flux: The Rising Tide of Geopolitical Risk

The international political landscape is arguably the most unpredictable factor influencing the global economy. Existing conflicts remain volatile, and the potential for new conflicts to erupt - whether due to resource scarcity, ideological clashes, or shifting power dynamics - presents a significant systemic risk. Such disruptions have cascading effects, including trade route interruptions, soaring commodity prices (particularly energy and critical minerals), and heightened uncertainty for businesses with international operations. Diversification across geographies and sectors becomes paramount. Investing in companies focused on cybersecurity and defense may also prove relevant, but requires careful consideration of ethical implications. The rise of nationalism and protectionism further complicates the picture, requiring investors to assess the political risks associated with specific regions and sectors.

3. The Regulatory Wave: Adapting to a Changing Landscape

Governments worldwide are increasingly focused on addressing pressing societal challenges, from the urgent need to combat climate change to reducing income inequality and strengthening data privacy protections. This translates to a surge in new regulations impacting a wide range of industries. Companies operating in the energy, finance, technology, and healthcare sectors are particularly vulnerable. Businesses that fail to anticipate and adapt to these regulatory shifts face escalating compliance costs, potential legal liabilities, and ultimately, diminished profitability. Sustainable investing (ESG) strategies might become less about positive impact and more about regulatory compliance. Investors need to prioritize companies with demonstrated commitment to proactive regulatory engagement and adaptation.

4. Recalibrating Value: The Future of Market Multiples

Following the pandemic-era boom, corporate earnings are in a phase of recovery and recalibration. Current market valuation multiples, reflecting optimism about future growth, could undergo a significant correction. If economic growth slows, as many economists currently predict, or if interest rates remain stubbornly high, these multiples may contract considerably. This scenario favors value investors, who focus on companies trading below their intrinsic worth. Conversely, growth stock investors, who prioritize companies with high growth potential, may experience portfolio declines. A deeper understanding of fundamental analysis and a willingness to embrace a long-term perspective are key.

5. The Potential for Active Management to Shine

The dominance of passive investing has been a defining characteristic of recent market trends. However, a period of heightened market volatility and complexity--driven by the factors outlined above--creates a fertile ground for skilled active managers to outperform passive benchmarks. Active managers possessing deep sector expertise and the ability to swiftly adjust portfolios based on evolving market conditions may be able to generate alpha (outperformance). While active management fees are generally higher, a period of significant market disruption could justify the additional cost for investors seeking to navigate uncertainty and capitalize on opportunities. It is crucial to carefully evaluate the manager's track record, investment process, and alignment of interests.

Looking Ahead: A Dynamic Investment Strategy

The investment landscape in 2025 and beyond demands a flexible and proactive approach. Constant monitoring of geopolitical developments, regulatory changes, and macroeconomic indicators is essential. Diversification, a focus on quality companies with strong fundamentals, and a willingness to adapt investment strategies based on evolving conditions are vital for navigating the uncertainties ahead.