What if the return of inflation has already begun?

For months, markets have been telling an extremely reassuring story.

Inflation is supposedly under control.
Oil prices should eventually stabilize.
Central banks are expected to cut rates again.
And the global economy is supposedly heading toward a “soft landing.”

In other words:

markets still largely believe in a gradual return to normal.

The problem is that several signals are beginning to tell the exact opposite story.

Oil is tightening again.
Commodities are recovering.
The US dollar is rebounding strongly.
And most importantly: the global financial system remains built on massive levels of debt.

In a world this indebted, the return of inflation becomes far more dangerous than a temporary increase in prices.

Because at this stage, the issue may no longer be purely economic.

It may be monetary.

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Markets Are Still Thinking Cyclically

…while the problem may be structural

For nearly 30 years, investors have been conditioned to expect the same pattern:

• economic slowdown,
• market stress,
• central bank intervention,
• rate cuts,
• liquidity injections,
• and eventually asset recovery.

This mindset was reinforced after:

• 2000,
• 2008,
• 2020,
• and nearly every major financial shock since then.

But the global system has changed profoundly.

We may gradually be entering a world that is:

• more energy-constrained,
• more inflationary,
• more geopolitical,
• more fragmented,
• and increasingly dependent on real-world resources.

In other words:

markets may still be analyzing a structural regime shift using tools designed for a world that no longer exists.

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Energy Still Governs the Global Economy

For years, the digital revolution created the illusion that the economy had become “virtual.”

Apps.
Cloud computing.
AI.
Digital services.
Financial abstraction.

But behind every digital layer lies a physical reality:

• electricity,
• copper,
• steel,
• transportation,
• oil,
• gas,
• mining,
• infrastructure.

Even artificial intelligence depends on:

• enormous data centers,
• semiconductor production,
• power grids,
• and strategic metals.

In other words:

the modern economy remains deeply dependent on energy and commodities.

And that may be where markets are underestimating risk the most.

Because a highly financialized system can absorb many things.

But it struggles far more with:

• expensive energy,
• scarce resources,
• and physical constraints.

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Why Comparisons With The 1970s Are Returning

History never repeats perfectly.

But economic mechanisms often rhyme.

The 1970s were characterized by:

• oil shocks,
• persistent inflation,
• geopolitical instability,
• weakening currencies,
• and highly volatile financial markets.

The major difference today?

Global debt levels are dramatically higher.

And that may make the current situation potentially even more unstable.

Back then, central banks could aggressively raise rates to crush inflation.

Today, the question is far more complicated:

how much pain can an ultra-indebted system realistically tolerate?

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Markets Underestimate How Fast Commodity Moves Can Become

Equity markets often decline gradually.

Commodity markets do not always behave that way.

Why?

Because commodity markets are:

• smaller,
• less liquid,
• more exposed to physical shortages,
• and far more vulnerable to supply disruptions.

For a while:

• everything appears calm,
• prices stagnate,
• investors relax.

Then suddenly:

• inventories tighten,
• sellers disappear,
• short positions unwind,
• and price movements accelerate violently.

Markets go from:

“there is no problem”

to:

“there is not enough supply”

extremely quickly.

And historically, this is often the point where inflation begins spreading through the entire system.

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Energy Inflation Is Much Harder To Control

This may be the real danger.

Markets still tend to treat inflation as temporary.

But some forms of inflation become structural when they are linked to:

• energy,
• commodities,
• deficits,
• logistics,
• and geopolitical fragmentation.

Because once energy prices rise:

• transportation costs rise,
• industrial costs rise,
• food prices rise,
• and production costs rise.

Virtually the entire real economy becomes affected.

And unlike purely financial bubbles, energy inflation is much harder to suppress quickly.

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Central Banks Are Becoming Trapped

This is probably the core issue.

The modern global economy is built on extraordinary levels of debt.

US public debt alone now exceeds $35 trillion.
Western governments continue running massive structural deficits.
And large parts of the global economy remain dependent on:

• refinancing,
• debt markets,
• and sustainable borrowing costs.

For years, the system functioned because:

• rates remained artificially low,
• and currencies slowly lost purchasing power over time.

But in a more inflationary environment, the system becomes much more fragile.

Why?

Because:

the more debt the system accumulates, the less it can tolerate high interest rates.

This is precisely what is trapping central banks.

They increasingly face an impossible choice:

Either:

• keep rates high,
• genuinely fight inflation,
• but severely damage:
  • governments,
  • real estate,
  • banks,
  • growth,
  • and financial markets.

Or:

• gradually loosen policy,
• inject liquidity again,
• tolerate higher inflation,
• and allow currencies to lose value over time.

In other words:

the system may no longer be able to preserve both monetary stability and financial stability simultaneously.

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Why Money Supply May Become Central Again

For a while, markets behaved as if money supply no longer mattered.

But M2 may remain one of the most important indicators in the global financial system.

M2 broadly measures:

• bank deposits,
• savings accounts,
• liquid cash,
• and readily accessible money within the economy.

In other words:

it measures how much money is actually circulating through the system.

Why does this matter?

Because over time:

• if money supply grows faster than real-world productive capacity,
• currencies tend to lose relative value.

But this process does not always appear immediately in consumer prices.

Very often, excess liquidity first inflates:

• real estate,
• equities,
• speculative assets,
• commodities,
• and scarce assets.

This may be one of the biggest misunderstandings among modern investors:

inflation does not only appear in grocery prices.

It often appears first in asset prices.

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The Monetary Illusion

This may be one of the least understood phenomena in modern finance.

Many people believe they are becoming wealthier because:

• their portfolios rise,
• their homes appreciate,
• or speculative assets surge.

But in some cases, they are not actually becoming richer.

They are simply losing purchasing power more slowly than the currency itself.

That is a critical distinction.

Because an asset can rise dramatically:

• not because it creates enormous value,
• but because the unit used to measure it is gradually losing value.

In other words:

sometimes assets are not becoming extraordinarily expensive.

Money itself is simply becoming less scarce.

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Markets May Have Chosen Inflation

I discussed this dynamic in a previous article:

Two Scenarios. One Winner. Is Your Portfolio Ready?

Recent market rebounds partly resemble:

• a short squeeze,
• technical repositioning,
• and a renewed risk-on environment.

But beneath that move, something deeper may be happening.

Markets may gradually be realizing that the system prefers:

• more liquidity,
• more deficits,
• and more inflation,
• rather than a genuine financial purge.

Why?

Because the alternative would be extremely painful:

• severe recession,
• widespread defaults,
• deeper real estate stress,
• massive asset destruction,
• budgetary crises,
• and financial instability.

In other words:

markets may be concluding that slowly devaluing the currency is politically easier than allowing the system to fully cleanse its excesses.

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Markets Have Become Addicted To Central Banks

This may be one of the biggest psychological changes of the past 15 years.

After:

• 2008,
• the European debt crisis,
• 2020,
• and repeated intervention cycles,

investors gradually internalized one powerful assumption:

whenever major stress appears, central banks will intervene.

Rate cuts.
QE.
Liquidity injections.
Market support.

The problem is that this framework becomes much harder once inflation returns.

Because central banks can print money.

But:

they cannot print oil,
copper,
gas,
or energy.

And that may become one of the defining fractures of the next economic cycle.

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The Dollar Paradox

The rebound of the US dollar may be one of the most important signals today.

Many people regularly predict:

“the end of the dollar.”

Yet during periods of genuine stress, global capital almost always returns to it.

Why?

Because:

• energy remains priced largely in USD,
• global debt remains heavily dollar-denominated,
• and crises create enormous demand for liquidity.

In the short term, a stronger dollar can:

• pressure risky assets,
• damage emerging markets,
• and tighten global financial conditions.

But over the longer term, another question emerges:

how long can an ultra-indebted system survive without continuous monetary expansion?

Historically, these systems often end up requiring:

• more liquidity,
• more deficits,
• more debt,
• and more money creation.

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AI Could Become The Perfect Bubble Of An Inflationary World

Artificial intelligence is likely a genuine technological revolution.

It is already transforming:

• software,
• automation,
• productivity,
• research,
• and potentially huge parts of the economy.

So the issue is probably not the technology itself.

The issue may be:

the financial pricing surrounding that technology.

Because AI sits precisely at the intersection of:

• real innovation,
• massive liquidity,
• speculation,
• and enormous energy requirements.

Historically, when a technological revolution meets:

• abundant liquidity,
• powerful narratives,
• and investors desperate for growth,

valuations can disconnect dramatically from reality.

The internet.
Railroads.
Telecommunications.
Electricity.

All of those revolutions were real.

And yet:

they also produced some of the largest financial bubbles in history.

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The Energy Paradox Of AI

This may be one of the most underestimated themes today.

AI appears digital.

But it depends massively on:

• data centers,
• electricity,
• semiconductors,
• copper,
• rare metals,
• and therefore… the physical world.

In other words:

the digital future depends deeply on energy.

And if:

• energy becomes more expensive,
• commodities tighten,
• and infrastructure costs rise,

then some AI valuations may become much harder to justify.

Especially if interest rates remain structurally higher for longer.

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Is This The End Of Risk Assets?

Probably not.

And that is exactly what makes this environment so complex.

Markets could enter a paradoxical phase:

• more liquidity,
• more inflation,
• assets rising nominally,
• while real purchasing power erodes underneath.

In other words:

markets may continue rising…

simply because money itself is becoming less scarce.

And that may make the coming years extremely deceptive for investors.

The real question may no longer be:

“are markets going up?”

But rather:

what is the real quality of that growth?

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Investors May Have Been Trained For A World That Is Disappearing

This may be the most important point of all.

For more than 15 years, investors were trained to buy:

• growth,
• liquidity,
• future narratives,
• promises,
• and cheap money.

Many now consider that environment normal.

But perhaps:

• abundant energy,
• near-zero interest rates,
• and dormant inflation

were never the norm at all.

Perhaps they were the historical anomaly.

Because historically:

• energy cycles always return,
• currencies gradually devalue,
• commodities eventually matter again,
• and monetary stability rarely lasts forever.

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Conclusion

Perhaps the real regime change is not only economic.

Perhaps it is civilizational.

For decades, the Western world built a system based on:

• abundant energy,
• expandable money,
• artificially low rates,
• and relatively stable globalization.

But if simultaneously:

• energy becomes scarcer,
• inflation becomes more persistent,
• debt becomes more fragile,
• and currencies become less credible,

then many financial assets may still be priced for a world that is slowly disappearing.

And that may be exactly what markets are still struggling to fully understand today.