Inflation, Policy Shifts and a More Fragile Cycle

An Inflationary Expansion — For Now

The global industrial recovery continues to broaden, supporting a resilient tone across risk assets. At its core is the extraordinary surge in AI-related capital expenditure, with hyperscaler investment now expected to exceed US$700bn in 2026 and approach US$1 trillion by 2027.

This investment cycle is feeding directly into earnings, with global EPS revisions running at their strongest pace in decades. However, it is also contributing to a more subtle but important shift in the inflation regime.

Recent US inflation data highlights this tension. While headline inflation remains relatively contained, the composition is becoming more concerning. Core CPI has re-accelerated and, notably, software prices are now rising materially after decades of deflation. This reflects the monetisation of AI functionality across corporate software stacks.

This dynamic is critical. While AI should ultimately be disinflationary, the initial phase is clearly inflationary, via:

• Higher capex intensity
• Increased pricing power in technology
• Stronger labour demand in high-skill sectors

Bond markets are beginning to reflect this shift. Long-end yields are rising, and inflation expectations remain elevated, reinforcing the view that this is an “inflationary boom” rather than a disinflationary recovery.

The implication is clear: the bar for central bank easing remains high, and the peak in the capex cycle may arrive sooner than markets currently expect.