Global markets are facing an increasingly stagflationary backdrop as inflation pressures intensify, growth diverges across major economies and central banks remain on alert, according to a new outlook from Franklin Templeton.
In its latest Macro Views: Growth grinds, inflation grows report, Franklin Templeton said higher oil prices, supply-chain disruptions linked to the closure of the Strait of Hormuz and growing demand from AI investment are adding to inflationary pressures across developed economies.
The investment manager said the US economy regained momentum in the first quarter of 2026, supported by technology-driven investment and stronger federal spending, but warned conditions were becoming more stagflationary.
“The US economy regained some momentum in the first quarter (Q1), led by tech-driven investment and stronger federal spending, but the backdrop is becoming more stagflationary,” the report said.
According to Franklin Templeton, inflation in the United States appears structurally closer to 3 per cent than 2 per cent, while higher energy costs and disrupted supply chains risk broadening price pressures across the economy. Consumers continue to spend, but real incomes are under pressure and discretionary demand has softened.
The report highlighted AI investment as an increasingly important source of inflation, pointing to rising costs for computing hardware, software, chips and data centres as demand continues to outstrip supply.
It said the combination of AI-driven spending and energy market disruptions could create broader supply bottlenecks that prove difficult to unwind.
Despite these challenges, technology remains one of the strongest contributors to US economic growth. Franklin Templeton noted spending tied to AI infrastructure remained well above long-term trends, while demand for credit among large firms continued to reflect investment in the AI buildout.
Labour market conditions also remained broadly stable, with payroll growth rebounding in March and April and unemployment holding at 4.3 per cent.
However, the report cautioned that weakening real incomes and a falling household savings rate could leave consumers more vulnerable to future economic shocks.
On monetary policy, Franklin Templeton maintained its expectation that the US Federal Reserve will keep rates on hold for an extended period, although it said the balance of risks had shifted.
Markets have moved from pricing multiple rate cuts to anticipating a 25-basis-point increase by the end of 2026 as inflation concerns intensify.
Across Europe, the report argued the region is experiencing a fresh inflation shock similar in some respects to 2022, but with important differences. Improved energy diversification and lower dependence on Russian gas mean energy availability is less of a concern, although weaker economic conditions leave the eurozone more vulnerable to slowing growth.
“Europe’s macro narrative since the start of the Middle East conflict resembles a stagflationary shock, but it is not a 2022 déjà vu,” the report said.
Franklin Templeton expects eurozone inflation to rise above 3 per cent in the near term, prompting further policy tightening from the European Central Bank after its June rate increase. The firm said another rate hike was likely in September as policymakers seek to contain inflation expectations.
Japan has so far proved more resilient, with first-quarter growth supported by exports and consumer spending. However, Franklin Templeton warned rising prices, supply constraints, weakening consumer sentiment and a softer yen could weigh on activity later in the year.
While headline inflation remains subdued due to government support measures, underlying price pressures are building.
The report noted higher energy costs and import prices are expected to flow through to households in coming months, strengthening the case for further policy tightening by the Bank of Japan.
“Japan’s near-term story remains one of resilience on the surface,” the report said, while warning that supply constraints, rising prices and declining sentiment “threaten to weigh on activity in the coming quarters”.
Against that backdrop, Franklin Templeton said it expects the Bank of Japan to raise rates in June and continue gradually tightening policy as inflation pressures become more entrenched.
