Please see the below article from Tatton Investment Management discussing persistent inflation pressures, rising bond yields, and the potential implications of Kevin Warsh’s appointment as Federal Reserve chair, received this morning – 18/05/2026.
Waiting for relief
Global equities edged up 1.5% in sterling terms last week, driven by US stocks and a firmer dollar. Most other markets were weaker and all are starting this week on the back foot. Donald Trump’s visit to China was light on detail but gave some reassurance: President Xi declared Washington and Beijing should be “partners, not rivals”, and China confirmed it will join a new Board of Trade and Board of Investment.
Bond prices were volatile and weak; both short-term and long-term bond prices in major currencies fell. Price falls means higher yields.
UK gilts are suffering because of the global bond markets’ problems and because of UK politics. Earlier in the week, 10-year gilt yields dipped below 5% but climbed back to 5.18% by Friday and are opening around 5,20%. We reiterate that persistently elevated gilt yields, relative to other bond markets, are down to structurally weak demand (including the Bank of England’s net bond sales) rather than purely politics. The potential for Andy Burnham to expand a future deficit has rattled some investors, but even in that case, we struggle to see how the UK’s debt and deficit metrics could become as stretched as the US. The risks have been clear for a while and the bond vigilantes are already getting paid. Long-term investors should at least benefit from almost certainly higher-than-inflation yield returns.
However, the near-term inflation outlook is adding to bond market unease. It’s not just about oil. Supply pressures on metals such as copper and silver — fuelled in part by AI infrastructure spending — are keeping price pressures elevated even as oil worries recede. Jerome Powell’s departure as Federal Reserve chair, with Kevin Warsh set to take over, has prompted debate about whether central banks might soften their 2% inflation targets. But we see that as unlikely in the near term.
Global growth is still resilient. Manufacturing business sentiment remains strong, job postings have been picking up worldwide; the UK economy grew at an annualised 2.4% in the first quarter of 2026. Both Washington and Beijing appear aligned on restoring oil and gas flows quickly as possible. China is showing tentative signs of recovery although the most recent data (issued today, Monday) was disappointing. This should be temporary as Beijing also wants to stimulate its domestic demand. That could mean buying more from the US, exactly as Trump has demanded for the last decade.
Inflation roundup
Global inflation surged 3.5% year-on-year in April, driven by the ongoing Iran war and persistently strong consumer demand. The US led the way, with its Consumer Price Index rising 3.8%, the highest inflation figure since 2023, while the Producer Price Index jumped 6.4%.
US petrol prices have risen more than 50% year-on-year, with consumers now paying around $4.50 per gallon. But inflation isn’t only about energy. Food prices rose 3.2% in the US, partly linked to global fertiliser shortages. Metals prices rose sharply too — particularly copper and silver — on the back of datacentre construction demand.
The Eurozone also recorded its highest inflation since 2023, at 3%, while UK figures for April are yet to be released. Unlike its peers, the UK saw a smaller jump in energy prices in March — cushioned by high fuel taxes — though faster UK inflation is expected in May. The UK and Europe are also helped by the fact that natural gas prices have fallen back, following a spike after the Iran war began.
Core inflation is sticky, with US core CPI up 2.8% in April. Some of that is down to a data blackout during the US government shutdown, but underlying rate is still uncomfortable. Consumer spending is holding up, offering little sign that higher energy costs are curbing demand. Europe is different: weak German employment — contracting at its fastest pace since the early 2000s — is bearing down on core inflation, which fell to 2.2%.
Central banks are caught in a bind. Norway and Australia have already raised rates; the ECB, Bank of England and Federal Reserve are signalling they may follow. The Fed, however, appears more dovish — a stance likely to deepen once new chair Kevin Warsh takes over. Given the resilience of the US economy and the inflationary impacts of AI spending, dovishness will be difficult to justify.
What the Fed can learn from the BoE
Central bank appointments are rarely as blockbuster as incoming Federal Reserve chair Kevin Warsh. Picked by Trump partly in hopes of lower interest rates, Warsh also has a distinct monetary philosophy: the Fed should wean markets off of the liquidity is has provided since the 2008 global financial crisis.
To understand what that might mean in practice, look to the Bank of England. Since 2022, the BoE has been running down its bond holdings through quantitative tightening (QT) — and it’s gone further than most. Unlike the Fed, the BoE remains a net bond seller. Measured against its own broad money supply gauge, M4, the BoE’s gilt holdings are at their lowest since 2012.
That’s damaged the gilt market. Gilt discussion often gets political but we have long argued the deeper problems are structural: outstanding issuance is skewed toward long-dated and inflation-linked bonds — making them especially sensitive to fiscal shocks. The BoE’s continued balance sheet reduction has compounded that weakness, selling into a market with structurally thin demand. That, more than politics, explains gilts’ persistent underperformance versus other sovereign bond markets.
Warsh’s approach would differ from the BoE’s purist stance. He’s proposed a trade-off: wean markets off central bank liquidity, but cut short-term interest rates in return. Done right, this hands liquidity creation back to private banks, potentially helping small businesses and creating a more vibrant economy.
But there’s no clean path. Trimming long-term bond support while cutting short rates steepens the yield curve, raises term premia, and could dent US equity valuations — the same dynamic that’s hurt UK assets. Add a weakening dollar, and the risks compound.
Warsh knows this, favouring a slow and cautious approach. The Fed’s committee structure makes radical change unlikely anyway. The BoE has been steady too — but the market has still felt it. Caution helps; it doesn’t insulate.
Please continue to check our blog content for the latest advice and planning issues from leading investment management firms.
Marcus Blenkinsop
18th May 2026