The global economic landscape is witnessing a striking split in inflation outlooks, reflecting a complex interplay of fiscal policy, monetary measures, and external shocks. As central banks navigate divergent paths, businesses and consumers alike face a shifting environment filled with both opportunities and risks.

Re-emergence and Reversal in Global Inflation Patterns

After the shockwaves of the pandemic and supply‐chain disruptions, many advanced and emerging economies found themselves grappling with elevated price pressures. By mid-2025, however, the narrative has shifted: some regions are on a steady path toward disinflation while others struggle with renewed upside risks.

Persistent core inflation pressures in certain markets stand in stark contrast to declining headline rates abroad. This reversal stems from policy decisions, currency dynamics, and shifting demand patterns that have reshaped the inflation outlooks across major economies.

The U.S. Anomaly: Sticking Points and Surprises

Inflation in the United States has eased from the post-pandemic peak but remains stubbornly above the Federal Reserve’s 2% target. Headline CPI dipped to 2.4% year-on-year in May 2025, yet core CPI held at 2.8%, reflecting continuing strength in housing and services.

Key factors driving the U.S. divergence include:

• New tariff policies introduced in April 2025, acting as a structural shock to consumer prices.
• A tight labor market with robust wage growth sustaining domestic demand.
• Rising consumer inflation expectations, with the New York Fed reporting a 1-year forward median of 4.3%, up from 3.0% in late 2024.

Forecasts remain elevated: Deloitte expects 2025 CPI inflation to average 2.9%, while Morgan Stanley and Apollo see risks above 3.0% by Q3 2025. Despite these pressures, the Fed has signaled no immediate rate cuts, maintaining its target at 4.25%–4.50% to temper upside surprises.

Europe and Asia: Disinflation, Rate Cuts, and Policy Divergence

In contrast, the eurozone has seen inflation drift down to 2.4% in 2024, with forecasts pointing to 2.1% in 2025 and 2.0% in 2026. This improvement is underpinned by weaker demand, a stronger euro, and lower energy costs.

The European Central Bank is now more inclined toward gradual rate cuts, seeking to support growth without reigniting price pressures. Meanwhile, Japan continues its long‐standing low-inflation regime under a loose monetary policy, with prices rising modestly.

China, too, remains in a subdued inflation environment. Slower growth and muted consumer confidence have left headline CPI well below that of Western peers, and fiscal support measures take precedence over tightening.

Emerging Markets: Currency Pressures and Imported Inflation

Emerging economies display the most volatility, driven by swings in currency values and commodity prices. A strong U.S. dollar in late 2024 raised import costs, fueling inflation spikes in many EMs.

Key observations include:

• Imported inflation shocks from currency depreciation against the dollar.
• Variation in food and energy price pass-through, especially among commodity importers.
• Central banks balancing rate hikes to stem inflation with the need to avoid damaging growth.

Drivers: Tariffs, Fiscal Expansion, Labor Markets, and Currency Moves

Understanding the divergence requires dissecting several intertwined drivers:

• Tariff policies in the U.S. have direct and indirect price impacts on domestic and global supply chains.
• Fiscal deficits are widening across major economies, with infrastructure and defense spending raising interest costs.
• Labor markets vary widely: the U.S. remains tight, while Europe and Japan exhibit softer wage dynamics.
• Currency movements—especially the dollar’s strength—have altered import price trajectories, amplifying inflation in weaker-currency regions.

Policy and Risk: Central Bank Dilemmas Amid Uncertainty

Central banks face a delicate balancing act. The Federal Reserve is poised to hold rates higher for longer to anchor inflation expectations. By contrast, the ECB, the Bank of England, and others may opt for cuts as disinflation takes hold.

Risks loom large: geopolitical tensions, potential tariff escalations, and unpredictable wage growth in core markets could upend forecasts. Emerging markets must also navigate the threat of capital outflows if advanced economy yields remain elevated.

Data Watch: Key Indicators for H2 2025

For policymakers and investors, several indicators will be critical in the coming months:

• Consumer surveys (NY Fed, University of Michigan) tracking forward-looking inflation expectations.
• Labor market reports, particularly wage growth and job openings.
• Currency indices to gauge imported inflation pressure, especially in EMs.
• Central bank communications for shifts in policy guidance.

As the second half of 2025 unfolds, the global economy stands at a crossroads. Divergent inflation expectations and policy responses offer both hazards and prospects. By closely monitoring data, central bank signals, and geopolitical developments, stakeholders can navigate this multifaceted environment with greater clarity and resilience.