SLOWING LIQUIDITY

17 June 2026

Overview

The Liquidity Tide Is Slowing

Most investors focus on the level of liquidity. The smarter question is whether liquidity is accelerating or decelerating.

Global liquidity continues to rise, but the rate of increase is slowing. Markets price the change in momentum, not the absolute level. That shift is already producing familiar late-cycle signals: strong commodity performance, narrowing market breadth and a bearish flattening yield curve.

The reason is simple. Money is leaving financial assets and flowing into the real economy. That supports growth, investment and corporate earnings, but it also removes some of the fuel that previously drove asset prices higher.

Historically, this has been the transition period between speculation and turbulence.

For investors, the implication is not panic but repositioning. Real assets, precious metals, energy, resource equities and other monetary inflation hedges tend to outperform when liquidity growth slows and debt monetisation becomes the preferred policy response.

The liquidity tide is still coming in.

It is simply no longer rising as fast as before.

 the liquidity tide is still coming in - late-cycle signals, debt dynamics, and capital rotation into real assets. Know where the capital is flowing to and get there before it arrives.

Glossary

Bearish Flattening Yield Curve

• This is a market condition where:
  • Long-term bond yields fall faster than short-term yields, or
  • Short-term yields rise while long-term yields fall
• The result is a flattening of the yield curve (the gap between long and short rates narrows) combined with a bearish signal for growth assets, especially equities.

The bond market is signalling that future monetary policy will need to be easier than currently priced. Note Kevin Warsh threatens to raise the policy rate to curb inflation.

Yield curve – the line plotting government bond yields across different maturities (e.g. 2-year vs 10-year).
Flattening – a reduction in the spread between short and long-term yields.
Bearish – expectations of economic slowdown, tightening conditions, or risk asset weakness.

This needs a bit more explanation, which is offered at the end of this piece...

1. THE LIQUIDITY TIDE IS SLOWING

There is a distinction that many investors miss, and missing it can be costly.

Global liquidity continues to rise in absolute terms. Recent estimates place it at around US$193 trillion. However, markets do not primarily react to the level of liquidity. They react to the rate of change.

That rate of change is now slowing.

The implication is significant. A liquidity environment that is still expanding, but expanding more slowly, tends to favour a rotation away from financial assets and towards real assets. Within the real asset universe, the greatest beneficiaries are often those most sensitive to monetary inflation.

The direction of the tide matters more than the height of the water.

Glossary

Liquidity - The availability of money and credit within the financial system.

Rate of Change - The speed at which a variable is increasing or decreasing.

Real Assets - Physical or tangible assets such as commodities, property and natural resources.

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2. WHERE WE ARE IN THE CYCLE

According to Michael Howell of CrossBorder Capital, the current phase is the speculation stage of the liquidity cycle.

The description is apt.

Artificial intelligence, semiconductors and robotics have generated extraordinary returns. Yet the broader market has not participated equally. Leadership has become increasingly concentrated. Market breadth has narrowed while valuations have expanded.

Historically, this combination has often appeared late in a cycle.

Volatility is beginning to rise. Market leadership is becoming narrower. Expectations have become elevated.

Trees do not grow to the sky.

The phase that has historically followed is what Howell describes as the turbulence stage. During this period, liquidity begins to drain more rapidly and the direction of risk assets often reverses.

That transition has not fully arrived, but the prudent time to prepare is before it becomes obvious.

Three conditions currently support the late-cycle interpretation.

First, commodity markets have begun to outperform. This is consistent with liquidity moving away from financial markets and into the real economy.

Second, yield curves are experiencing bearish flattening. Long-term yields are rising, but short-term yields are rising even faster, compressing the spread between them.

Third, market breadth continues to narrow despite resilient headline indices.

All three conditions are now visible.

Glossary

Market Breadth - The proportion of shares participating in a market move.

Bearish Flattening - A yield curve compression caused by short-term interest rates rising faster than long-term rates.

Yield Curve - A graph showing government bond yields across different maturities.

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3. WHY IS LIQUIDITY SLOWING IF CENTRAL BANKS REMAIN LOOSE?

At first glance, the slowdown appears puzzling.

Most major central banks are not aggressively tightening monetary policy. Yet financial liquidity is clearly decelerating.

The explanation is straightforward.

Money must always be somewhere.

What appears to be happening is a migration of capital away from financial assets and into the real economy.

That migration is supporting stronger-than-expected economic activity, particularly in the United States.

Nominal GDP growth of 7 to 8 per cent is entirely plausible when considering:

• Massive AI-related capital expenditure

• Persistent fiscal deficits

• Expanding energy export revenues

This shift benefits commodities and many operating businesses.

However, it is not automatically positive for financial asset valuations.

For years, Wall Street received the first wave of liquidity. Asset prices rose well ahead of underlying earnings.

Now the process is reversing.

The earnings are beginning to appear, but the liquidity that previously expanded valuation multiples is increasingly flowing elsewhere.

Main Street is receiving its turn.

That transition is rarely smooth.

The key principle is sequencing.

Liquidity leads economic activity.

Financial markets rise first because money arrives first.

The real economy improves later because investment eventually creates output, employment and profits.

When capital leaves financial markets and enters productive activity, earlier optimism becomes justified. However, the fuel for further multiple expansion begins to diminish.

Glossary

Nominal GDP - Economic growth measured without adjusting for inflation.

P/E Ratio - Price divided by earnings, a common valuation measure.

Multiple Expansion - Rising valuations caused by investors paying more for each unit of earnings.

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4. THE GLOBAL DEBT MACHINE

The backdrop to the liquidity story is unprecedented debt accumulation.

Across much of the developed world, capital markets increasingly function as debt refinancing systems rather than engines of productive investment.

Some estimates suggest that roughly four out of every five primary market transactions globally are debt rollovers rather than new financing.

Liquidity and debt form a closed loop.

Debt requires liquidity for refinancing.

Liquidity is increasingly created through collateralised lending.

According to World Bank data, approximately 75 to 80 per cent of global lending is collateral-based.

The principal collateral consists of government bonds and property.

The system therefore depends on maintaining confidence in both.

Should debt markets become unstable, liquidity can contract rapidly.

Historically, there has been only one durable solution to excessive sovereign indebtedness.

Monetisation.

Governments rarely default outright.

Instead, they reduce the real burden of debt through inflation and currency dilution.

Japan demonstrated this following its post-1990 collapse through quantitative easing and prolonged monetary expansion.

China appears to be moving along a similar path after decades of debt-fuelled property investment.

Much of the resulting liquidity has flowed into gold, traditionally viewed as a store of value.

Increasingly, price discovery in gold is being influenced by Asian demand, particularly through the Shanghai market.

The United States is not exempt.

The Treasury has increasingly favoured issuing short-dated bills rather than longer-term bonds. Roughly half of federal debt now matures within two years.

Weekly refinancing requirements approach US$329 billion.

Banks willingly absorb this debt because expanding fiscal deficits simultaneously create deposits that require income-producing assets.

The result is a form of ongoing monetisation.

Milton Friedman would have recognised the implications immediately.

Glossary

Debt Monetisation - Financing government debt through money creation.

Collateralised Lending - Lending secured against assets.

Quantitative Easing - Central bank asset purchases designed to increase liquidity.

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5. THE SUPPRESSION OF VOLATILITY

One of the least discussed aspects of today's system is the active management of bond market volatility.

The key indicator is the MOVE Index, often described as the bond market's equivalent of the VIX.

A growing share of Treasury demand now comes from hedge funds operating highly leveraged basis trades.

These trades involve purchasing physical bonds while simultaneously selling futures contracts, profiting from small pricing differences.

The strategy works only when volatility remains low.

If volatility spikes, leverage must be reduced and demand disappears.

The implications extend beyond hedge funds.

Collateral values throughout the financial system depend on volatility assumptions.

Low volatility means lower collateral haircuts and a larger collateral multiplier.

This supports greater lending and greater liquidity.

High volatility has the opposite effect.

Liquidity contracts.

Treasury buyback programmes appear designed, at least in part, to support market functioning by replacing less liquid bonds with newly issued securities.

Whether this can continue indefinitely remains uncertain.

The arithmetic is becoming increasingly difficult.

If nominal GDP is growing at 7 to 8 per cent while ten-year Treasury yields remain around 5 per cent, long-duration investors are accepting negative real returns.

That imbalance may eventually require adjustment.

Glossary

MOVE Index - A measure of expected US Treasury market volatility.

Basis Trade - A leveraged strategy exploiting price differences between bonds and futures.

Collateral Multiplier - The amount of lending supported by a given quantity of collateral.

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6. WHAT THIS MEANS FOR INVESTORS

The broad implication is a gradual rotation away from financial assets and towards real assets.

Understanding the difference between monetary inflation and consumer price inflation is crucial.

Consumer inflation reflects both monetary factors and real-world production costs.

For decades, powerful deflationary forces such as globalisation, cheap energy and technological productivity offset much of the inflation generated by monetary expansion.

As a result, financial assets substantially outperformed consumer purchasing power.

Gold performed even better.

Since 2000, gold has risen approximately fifteen-fold, compared with roughly six to seven times for major US equity indices.

If US federal debt continues expanding at 7 to 8 per cent annually, as projected by the Congressional Budget Office, investors require returns above that level merely to preserve purchasing power measured against monetary dilution.

Historically, the assets most capable of achieving this have included:

• Precious metals

• Prime residential property

• Energy and resource companies

• Food / agricultural

• Select cryptocurrencies (dangerous)

Within commodities, the traditional sequence often begins with precious metals, followed by industrial metals and finally agricultural products.

There are signs that this progression is underway.

Oil also appears historically inexpensive relative to gold.

The long-term gold-to-oil ratio has averaged around 20. Current pricing implies substantial upside - $200? - for oil if that relationship reverts towards historical norms.

Energy producers and mining companies provide leveraged exposure to these themes.

A further possibility deserves consideration.

If inflationary pressures continue building, the Federal Reserve may ultimately be forced to raise interest rates despite widespread expectations of easing.

Such an outcome remains controversial, but it cannot be dismissed.

And finally, geopolitical. Middle East and Ukraine rebuilding contracts anyone? Iran, former demon, is being recognised and will be made into the new Protector Of West Asia... with all its resources, technological and engineering capabilities, plus a market of 90+m consumers, once sanctions are off and frozen assets restored. Pity Europe cannot see the same for Russia.

Glossary

Monetary Inflation - Expansion of the money supply that reduces currency purchasing power.

Consumer Price Inflation - Rising prices paid by households for goods and services.

Gold-to-Oil Ratio - A valuation measure comparing the relative prices of gold and crude oil.

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7. CONCLUSION

The immediate challenge is not prediction.

It is context.

Markets move through identifiable liquidity cycles. Understanding the phase of the cycle matters more than forecasting the exact timing of every turn.

The evidence increasingly suggests that the speculation phase is maturing and the turbulence phase is approaching.

That does not guarantee an imminent market decline.

It does suggest that the balance of probabilities is shifting.

In such an environment, portfolio construction becomes more important than market forecasts.

A diversified core allocation tilted towards monetary inflation hedges, real assets and late-cycle sectors appears increasingly rational.

The liquidity tide has not yet gone out.

But it is no longer rising as quickly as before.

For investors, that distinction may prove to be one of the most important developments of the coming years.

NOTE ON FLATTENING YIELD CURVE

Did you spot an apparent contradiction? - long-term yields will be lower not higher than yields today, though we are in aperiod of higher inflation. Surely yields will have to be higher for longer?

This apparent contradiction is exactly why yield curve analysis can be confusing.

The key point is that long-term bond yields are driven by three things - not only by inflation, but by expectations of future growth and expected future short-term interest rates.

If investors believe that:

• Inflation is currently high, and

• Kevin Warsh central bank (or any other CB) may raise rates further in the short term (as is currently expected)

• Those higher rates will eventually slow the economy,

• > then investors may conclude that rates will have to be cut later.

• Higher rates will raise the dollar, making gold - which has no yield - less attractive

In that case they sell some gold perhaps, to buy long-dated bonds today, locking in current yields before future rate cuts arrive. The increased demand pushes bond prices up, long-term yields down, gold down, equities down.

So the market is effectively saying:

"We think policy may become tighter in the near term, but so tight that it ultimately forces easier policy in the future."

A simplified example:

• 2-year Treasury yield = 5.0%

• 10-year Treasury yield = 4.5%

The 10-year yield is lower because investors expect that over the next decade the average policy rate will be below today's 5%.

The bond market is not saying inflation is harmless. It is saying that future growth will be weak enough that inflation and interest rates will eventually fall.

A useful way to think about it is:

• Inflation risk → pushes yields up.

• Recession risk → pushes yields down.

• In a bearish flattening, recession fears are beginning to outweigh inflation fears at the long end of the curve.

That is why long bonds (price up = yield down) can rally even while central bankers are still talking tough on inflation. The market is looking beyond the next few meetings and pricing the entire economic cycle.

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INFRANOMICS ON THE INFLATION DATA THAT CRASHED THE MARKETS ON 10 JUNE 2026

11 June 2026

LITA | Living in the Air | 11 June 2026

OVERVIEW On 10 June 2026, fresh US Consumer Price Index data landed and the equity market sold off sharply - the S&P 500 down 1.2%, the Nasdaq 1.6%, the Magnificent Seven 1.9%. This post unpacks what the data actually said, why the methodology matters as much as the number, what the commodity and oil curve are pricing in, and what it means for real purchasing power, Fed policy, and the broader macro trade. This is not a routine inflation print. It is a signal.

Red Hot: What the June 2026 Inflation Data Really Tells Us

I. What Is the CPI - and Why Does the Definition Matter?

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The market reaction on 10 June was immediate and unambiguous. The S&P 500 fell 1.2 percent. The Nasdaq fell 1.6 percent. The Magnificent Seven - the small cluster of technology companies that have for years carried the index - dropped 1.9 percent. Before asking what the number means, it is worth asking what the number actually is.

The CPI does not stand for Consumer Price Inflation. It stands for the Consumer Price Index - a basket of goods and services compiled by the Bureau of Labor Statistics, intended to represent what the average American household spends money on. The BLS updates the composition of that basket over time: what Americans bought in 1914 differs substantially from what they buy in 2026. Within the basket, different items carry different weightings. Shelter, measured through a construct called Owner's Equivalent Rent, carries one of the largest weights - and is, as we shall see, a source of ongoing controversy.

The number you hear on the evening news - the "inflation rate" - is not the index itself. It is the year-on-year rate of change of the index. This distinction matters. The index measures the price level. The inflation rate measures how quickly that level is rising. Prices, as a general historical matter, have only ever moved up and to the right. The question is always: how fast?

"The inflation rate is not the price level. It is the speed at which the price level is rising. The price level does not fall. This is not an accident — it is a feature of debt-based monetary systems."

From 1980 to 2020 - a forty-year span - US prices rose at a remarkably consistent annual rate of approximately 2.5 percent. That trend is now decisively broken. The current price level sits roughly 19 percent above the long-run trend rate of growth. To understand why that matters structurally rather than cyclically, consider compounding. Suppose the CPI index stands at 100. A 10 percent inflation rate takes it to 110. The following year, the same 10 percent rate does not add 10 points — it adds 11, taking the index to 121. The year after, it adds 12. The starting point rises with each pass. Inflation is not arithmetic; it is exponential. Its burden on ordinary households compounds exactly as a debt does.

MECHANISM: The Compounding Price Level

Index at 100 → +10% → 110 → +10% → 121 → +10% → 133.1. The same rate of inflation inflicts an ever-larger absolute increase on the price level because the base rises each period. After ten years of 10% inflation, the original basket costs 2.59 times what it cost at the start. The purchasing power of fixed wages or savings erodes correspondingly.

The inverse of the CPI - the purchasing power of the dollar - traces a curve that approaches zero asymptotically. It does not crash to zero in a straight line; it declines in a shape that accelerates at the margin. Monetarists track this differently: they define inflation as the rate of growth of the money supply. During 2021, M2 - the broad money supply - grew at a peak annual rate of approximately 27 percent. By the simple logic of supply and demand, if the supply of money doubles overnight and the supply of Ferraris does not, the price of Ferraris rises. That mechanism propagated through the US economy over the following five years, producing the great inflation of 2021–2026.

GLOSSARY — Chapter I

Consumer Price Index (CPI) — A weighted basket of goods and services compiled by the Bureau of Labor Statistics (BLS) to track changes in the price level faced by the average US household. The reported "inflation rate" is the year-on-year percentage change in this index, not the index level itself.

Owner's Equivalent Rent (OER) — The BLS's (US Bureau of Labor Statistics) estimate of what a homeowner would theoretically pay to rent their own home. It is not a market transaction; it is a survey-derived imputation. Because it carries heavy weight in the CPI basket, critics argue it systematically understates or distorts shelter inflation relative to actual housing costs.

M2 (Broad Money Supply) — A measure of the money stock including currency in circulation, checking deposits, savings deposits, and money market funds. Monetarist economists treat the rate of growth of M2 as the primary driver of inflation over the medium term.

Compounding Inflation — The mathematical consequence of applying a percentage rate of change to a rising base. Each year's inflation applies to a larger starting level, so the absolute price increase grows even when the percentage rate is unchanged. This is structurally equivalent to compound interest in reverse from the perspective of purchasing power.

II. Measuring the Same Thing Three Ways — CPI, PPI, and PCE

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There is no single authoritative inflation number. There are three primary indices, each tracking the same underlying reality through a slightly different lens.

CPI — the measure that drove Tuesday's market reaction — tracks prices at the consumer level. PPI, the Producer Price Index, tracks prices at the level of the firm: what companies are paying for inputs before those costs are passed along to end consumers. PCE, the Personal Consumption Expenditure index, is the measure the Federal Reserve actually uses when setting policy. All three are methodologically similar; they differ in their precise basket definitions, their treatment of substitution, and their weighting structures.

The relationship between PPI and CPI contains one of the more useful leading indicators available. Firms feel inflation before households do, because input cost increases take time to flow through supply chains and pricing decisions into the retail environment. PPI typically leads CPI by one to two months. On Tuesday's data, that relationship is pointing upward: the PMI surveys - purchasing manager indices, which track what companies are actually paying for inputs - show the prices-paid component for services at the highest level since 2022. The manufacturing equivalent dipped slightly but remains near 2022 levels. PPI is elevated. The CPI should follow.

"PPI leads CPI by one to two months. The PMIs are flashing amber. The direction of travel is not ambiguous."

There are two ways PPI inflation fails to translate into CPI inflation. The first is margin compression: the firm absorbs the cost increase rather than passing it on, accepting a reduction in profitability. The second is demand destruction: the firm attempts to pass it on, but consumers, already stretched, refuse to pay. Consumption falls rather than prices rising. During recessions, this dynamic can push CPI negative - as it briefly did in 2008, when the year-on-year rate touched minus 2 percent. Today, we are not in that environment. The PMIs suggest upward pressure, not compression.

PCE per capita — total personal consumption spending divided by the US population - currently stands at approximately $129,000 per person per year. Since the end of the gold standard in 1971, this per capita spending figure has outpaced the official CPI index by nearly 100 percent. Stated differently: what Americans are actually spending has risen more than twice as fast as the official price index. The gap between M2 growth and CPI over the same thirty-five-year period is even wider - M2 has outpaced official inflation by 174 percent. The CPI is not fabricated, but it is a political document as much as a statistical one, and the gap between it and lived experience is structural, not incidental.

MECHANISM: PPI → CPI Transmission

Input cost increases (PPI) are initially absorbed at the firm level. If the firm can pass them on - because demand is sufficient and the consumer has income - they appear in CPI one to two months later. If the firm cannot pass them on to consumers, the result is margin compression (negative for equities) or demand destruction (negative for growth). The PMI prices-paid component is a forward indicator of where PPI is heading, and therefore where CPI will likely follow.

NOTE: How commodity prices flow into CPI

The path from a commodity price move to a CPI print involves several stages, each with its own lag and attenuation factor.

Stage 1 — Raw commodity price. Oil, natural gas, agricultural goods, and metals trade on global markets. Their spot prices reflect supply disruption, geopolitical risk premia, and speculative positioning in real time. These are the prices that make headlines.

Stage 2 — Producer costs (PPI). Energy and raw material price increases flow immediately into the cost structure of firms - whether manufacturers running oil-heated furnaces, transport companies buying diesel, or food processors buying grain. The Producer Price Index captures this. Because firms are larger and more price-sensitive buyers than households, the signal appears here first.

Stage 3 — Consumer prices (CPI). Firms facing higher input costs must decide whether to absorb the hit (margin compression) or pass it on through higher consumer prices. If they pass it on, the increase appears in CPI with a one-to-two-month lag. The magnitude of pass-through depends on demand conditions: if consumers have money and few alternatives, the full increase is transmitted; if they are financially stretched, the firm eats part of it.

Stage 4 — Second-round effects. Energy cost increases do not stop at the pump. They raise the cost of every good that is transported, manufactured using energy-intensive processes, or produced by workers demanding wage compensation for higher living costs. These second-round effects are slower to appear in CPI but are often more persistent than the initial commodity shock.

A more complete inflation pipeline looks like this:

Commodity Prices

↓

ISM / PMI Prices Paid

↓

PPI (Producer Price Index)

↓

Intermediate Demand Prices

↓

Finished Goods Prices

↓

Wholesale Prices

↓

Retail Prices

↓

CPI / PCE

Today's context. WTI crude oil has risen sharply since the outbreak of the Middle East conflict, and the futures curve - as discussed in Chapter IV - is now pricing in elevated oil for the medium term. The BLS does publish an energy sub-component within CPI, and it is already showing up as a positive contributor. The lag dynamics mean the full impact of oil prices at current levels has not yet been fully reflected in the headline CPI number. On the current trajectory, it will be.

GLOSSARY — Chapter II

Producer Price Index (PPI) — Measures changes in the prices received by domestic producers for their output. Because firms experience input cost increases before passing them to consumers, PPI leads CPI by approximately one to two months and functions as a forward indicator of consumer inflation.

Personal Consumption Expenditure Index (PCE) — The Federal Reserve's preferred measure of inflation. Compiled by the Bureau of Economic Analysis rather than the BLS. Differs from CPI primarily in that it adjusts for consumer substitution (when consumers switch to cheaper alternatives) and uses a broader population base. Generally prints slightly below CPI.

Purchasing Manager Index (PMI) — Prices Paid Component — A survey-based indicator in which purchasing managers at companies report whether input prices rose, fell, or were unchanged relative to the prior month. The prices-paid sub-component is a real-time leading indicator of PPI and, with a further lag, CPI.

Margin Compression — The reduction in a company's profit margin when input costs rise but the firm cannot or does not raise output prices equivalently. Margin compression is bearish for equity earnings but can temporarily suppress CPI by absorbing cost increases at the corporate level.

Demand Destruction — The process by which rising prices reduce consumption, as households find they cannot afford to maintain previous spending levels. When demand destruction is severe, it caps or reverses price increases - but at the cost of economic contraction.

III. Inside the Print — What Is Actually Driving Inflation?

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The headline CPI number for May - the data released on 10 June - came in with the highest year-on-year reading since May 2023. The core reading, which strips out food and energy to provide a read on underlying domestic inflation pressures, came in at 2.9 percent. The Fed's target is 2 percent. It is worth noting that the Fed has now been above its own 2 percent target for 63 consecutive months. The target itself has an almost comically contingent origin: it was not derived from economic theory, but from an offhand comment on a New Zealand television programme in the 1980s, subsequently adopted by the Reserve Bank of New Zealand and then by the Federal Reserve. Its authority is entirely institutional rather than empirical.

Within the headline print, the principal drivers are energy and services - not goods. This matters for the policy debate. The tariff-related inflation narrative that has dominated discussion since early 2025 is not visible in the core goods component, which barely registers and remains far below the levels seen in 2021–2023. The inflation being experienced now is not a tariff story. It is an energy story and a services story.

On the goods side, May actually registered the first month-on-month decline since May 2025 — technically deflation within that sub-basket. Within services, transportation services dragged the core print down by 0.6 percentage points, driven by an unexpected 1.7 percent month-on-month decline in car insurance. This is statistically anomalous. Car insurance premiums have, by most observable measures, roughly tripled over the past two years. A sudden 1.7 percent decline in the official index sits awkwardly alongside that lived reality and invites scrutiny of the measurement methodology.

Shelter is the most consequential component. It carries the largest weighting in the CPI basket and, after a period of softening, now appears to have bottomed and resumed its upward trajectory. Shelter inflation re-accelerating is structurally significant: it is persistent, it is not supply-shock driven, and it is not something the Fed can meaningfully address through rate increases without simultaneously crushing the housing market and the broader economy.

Medical care commodities offer a countervailing signal. Pharmaceutical drug prices have now fallen in five consecutive months - genuine deflation in a category where it is not merely welcome but urgently needed. Medical equipment and supplies similarly show no inflationary pressure. Against the backdrop of the broader print, these are isolated points of relief rather than a systemic trend.

Electricity is moving in the opposite direction. The cost per kilowatt-hour is up 45 percent since 2020 and is rising parabolically. The data centre build-out - driven by AI infrastructure demand - is a material contributor. Energy demand from computing is not a future consideration; it is already embedded in the inflation data.

"The inflation being experienced in June 2026 is not a tariff story. Goods are almost irrelevant. This is an energy and services inflation - and shelter is re-accelerating."

GLOSSARY — Chapter III

Core CPI — CPI calculated after removing food and energy prices, which are considered more volatile. Core CPI is intended to reveal the underlying structural rate of domestic inflation, stripped of transitory commodity-driven noise. The May print came in at 2.9 percent - well above the Fed's 2 percent target.

Headline CPI — The full CPI including food and energy. More volatile than core CPI but more representative of what households actually spend. The May headline print reached its highest level since May 2023, driven principally by energy.

Hedonics (Hedonic Adjustment) — A BLS methodology that adjusts prices downward when a product's quality is deemed to have improved. Critics argue hedonic adjustments systematically understate inflation by treating capability improvements (e.g., a faster computer) as price reductions, even when the actual cash outlay has risen.

Substitution Bias — A known distortion in fixed-basket price indices. When the price of one good rises, consumers switch to cheaper alternatives. A fixed basket does not capture this substitution and therefore overstates inflation - or alternatively, by changing the basket to reflect substitution, the index is criticised for understating the real cost of maintaining a fixed standard of living.

Shelter Inflation / OER — The single largest component of CPI. Measured primarily through Owner's Equivalent Rent - a survey asking homeowners what they would charge to rent their own home. This metric lags actual market rent changes by 12–18 months, meaning shelter's weight in CPI both understates rising rents on the way up and understates falling rents on the way down.

IV. The Oil Curve Is Speaking - And the Market Is Only Just Beginning to Listen

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The energy component of Tuesday's CPI print is a lagging reflection of what the oil futures market has been signalling for months. WTI crude - the US benchmark - has risen approximately 20 percent in the wake of the Middle East conflict. Before the outbreak of hostilities, prompt WTI was trading around $65. The May 2027 futures contract is now pricing WTI at approximately $77 - a recognition by the forward market that this conflict is neither short nor easily resolved.

The structure of the crude futures curve tells a more precise story than the spot price alone. In the early stages of the conflict, the curve was sharply backwardated: short-dated contracts traded far above longer-dated contracts, reflecting an assumption that disruption would be temporary and that prices would revert. That assumption has progressively been unwound. The further out on the curve you look - March 2027, May 2027 - the more those forward prices have risen. The market is pricing in structural elevation, not a transitory spike.

On Tuesday evening, there was a further escalation. The conflict does not appear to be approaching resolution. The oil market has been slow to price in permanence - it typically is - but the gradual steepening of the forward curve represents a collective revision of probability. Each uptick in the longer-dated contracts is the market extending its estimate of how long elevated oil prices will persist.

MECHANISM: Backwardation, Contango, and What the Curve Is Telling You

Backwardation — short-dated prices above long-dated prices — signals that markets expect supply tightness to ease. Contango — long-dated above short-dated — suggests supply tightness is expected to persist or worsen. The current WTI curve, with longer-dated contracts moving up toward $77, is consistent with a market revising toward persistent supply disruption rather than temporary shock. For inflation forecasters, this matters: if oil stays elevated, energy CPI contributions will not reverse. They will compound into second-round effects throughout the services and goods economy.

The implication for inflation is direct. Energy's contribution to headline CPI was near zero or mildly negative for much of 2024. It is now a positive contributor, and on the current forward curve, that contribution will persist. The data centre electricity demand story reinforces this: the US grid is absorbing a sustained increase in baseload demand from AI infrastructure. Oil, natural gas, and electricity are all heading in the same direction. The Fed's preferred practice of stripping energy out of the core reading provides analytical clarity on structural domestic inflation, but it does not mean energy inflation is economically inert for households or for the trajectory of the headline number.

GLOSSARY — Chapter IV

WTI Crude (West Texas Intermediate) — The primary US crude oil benchmark. WTI is a light, sweet crude traded on the NYMEX. The prompt (front-month) futures contract is the price most commonly quoted in financial media. The forward curve — all the contracts at various future expiry dates — reveals market expectations about future supply and demand conditions.

Backwardation — A futures market structure in which near-term contracts trade at higher prices than longer-dated contracts. Typical in commodity markets experiencing acute supply disruption, and usually interpreted as a temporary condition. The unwinding of backwardation in the WTI curve — with longer-dated contracts rising toward short-dated levels — signals a market revising its view of disruption from temporary to structural.

Contango — The opposite of backwardation: longer-dated futures prices exceed near-term prices. Common in well-supplied markets where storage costs are priced in. In crude oil, contango typically signals market expectations of continued or worsening supply tightness at a future point.

Second-Round Inflation Effects — Price increases that propagate through the economy after an initial commodity shock. If oil rises and transport costs increase, every good that is shipped becomes more expensive. If workers face higher energy bills at home, they demand wage increases, which raise firm costs, which are passed on in prices. Second-round effects are slower to appear in inflation data than the initial shock but are typically more persistent.

V. The Policy Trap - What the Fed Cannot Fix

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Following the May CPI print, the market is now fully pricing in one Federal Reserve rate hike over the next twelve months, with a slight lean toward a second. This is, in the analytical framework of the inflation being observed, precisely the wrong response.

Monetary policy - raising interest rates - operates by suppressing demand. It makes borrowing more expensive, discourages consumption and investment, and eventually slows the rate at which money circulates through the economy. This is a rational response to demand-pull inflation: inflation driven by an excess of money chasing a relatively fixed supply of goods. It is not a rational response to cost-push inflation — inflation driven by a supply-side shock that reduces the quantity of goods available regardless of demand.

Approximately 20 percent of global WTI production has been disrupted by the current Middle East conflict. No increment of interest rate increases will restore that supply. Raising rates will not bring oil production back online. It will not reduce electricity demand from data centres. It will not lower shelter costs — in fact, by raising mortgage rates, it is more likely to worsen them, as higher financing costs reduce housing supply by strangling construction.

What raising rates will do in this environment is suppress domestic demand, compress corporate margins, slow wage growth, and - over time - trigger the demand destruction that is the only mechanism by which cost-push inflation resolves in a monetary system unwilling to directly intervene in supply. The medicine works, but it works by making people poorer rather than by fixing the underlying supply disruption.

The real yield picture is already turning. Short-term real yields - the nominal rate minus inflation - are now negative: if you hold money in a money market fund, you are losing real purchasing power in absolute terms. Longer-dated bonds still carry a positive real yield: the 10-year Treasury offers approximately 0.6 percent above inflation; the 30-year offers 1.17 percent. This is a modest real return relative to the risk being taken on, but at least it is positive... unlike the short end.

"Raising rates will not reopen a blocked strait or rebuild a pipeline. It will slow demand until households can no longer afford to pay the elevated prices. That is not a solution. It is a managed recession."

The market structure on Tuesday reflected this ambiguity. Yields at the short end barely moved: the market has already priced in the rate trajectory. At the longer end, yields rose slightly, producing a modest steepening of the curve - though the broader trend over recent weeks and months has been flattening, as the market prices in the probability that the Fed will tighten into a slowing economy. The dollar-yen pair continued to melt higher, raising the probability of Bank of Japan intervention at the upcoming policy meeting. Oil was up 2 percent on the day. Volatility indices spiked, unwinding part of the dispersion trade that had been compressing equity correlations.

MECHANISM: Demand-Pull vs. Cost-Push Inflation

Demand-pull inflation arises when aggregate demand exceeds aggregate supply - too much money chasing too few goods. Rate increases suppress demand and are the appropriate tool. Cost-push inflation arises when supply is constrained - a commodity shock, a geopolitical disruption, a structural underinvestment in productive capacity. Rate increases do not address the supply constraint; they address inflation only by suppressing demand to the point where it meets the reduced supply. The cost is economic contraction. The current inflation in the United States is primarily cost-push in character. The policy toolkit is mismatched to the problem.

GLOSSARY — Chapter V

Demand-Pull Inflation — Inflation driven by excess demand relative to supply. The classic monetary inflation: too much money chasing too few goods. Responsive to interest rate increases, which reduce the purchasing power of borrowers and slow the velocity of money.

Cost-Push Inflation — Inflation driven by increases in the cost of production, typically from supply-side shocks: commodity price spikes, energy disruptions, supply chain breakdowns. Not responsive to interest rate increases in a direct sense; rates work only by inducing demand destruction, which is a slower and more economically costly mechanism.

Real Yield — The nominal yield on a bond minus the inflation rate. A positive real yield means the bondholder is earning a return above the rate of price erosion; a negative real yield means they are losing purchasing power in real terms even while receiving nominal interest payments. Short-term US real yields turned negative on the May inflation data.

Yield Curve (2-30 Spread) — The difference between short-dated and long-dated government bond yields. A steepening curve — where long yields rise relative to short yields — typically reflects rising inflation expectations or growth optimism. A flattening curve, as seen over recent months, can signal that the market expects the central bank to tighten into a slowing economy.

Dispersion Trade — A volatility arbitrage strategy that profits when individual stock volatilities are high but their correlations are low (they move independently). When macro risk events hit - as with a significant inflation print - correlations spike, equities move together, and the dispersion trade unwinds, adding to market selling pressure.

Conclusion: What This Means

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The June 10 inflation print is not a surprise to anyone who has been watching the commodity complex, the forward oil curve, or the PMI surveys over the past three months. The market's reaction, however, suggests that equity pricing had not fully discounted what those leading indicators were signalling.

The inflation being observed in mid-2026 is not the demand-pull monetary excess of 2021. It is structurally distinct: driven by a geopolitical supply shock in energy, by the persistent re-acceleration of shelter costs, and by second-round effects now beginning to show up in services. The goods sector - the tariff narrative - is essentially absent from the data.

The Fed faces a policy environment in which the available tools are poorly matched to the problem. Rate hikes will slow the economy. They will not fix an oil supply disruption. The market is pricing in those hikes anyway, and the two-year/thirty-year curve will continue to be the instrument to watch. Negative short real yields are a silent tax on savers and money market holders. The long end, offering modest but positive real yields, remains relatively more attractive in that context.

For those positioned in physical assets - gold, energy infrastructure, industrial metals, real-yield instruments such as solid dividend plays - the May CPI print is not a surprise. It is confirmation. The rotation thesis does not require the data to deteriorate further; it simply requires it to persist. On Tuesday's evidence, there is no structural reason to expect it to do otherwise.

The author holds positions in SGLN, AUCP, AIGI, GDX, and GDXJ. This post is analytical commentary only and does not constitute investment advice. All figures sourced from public BLS releases and public futures market data as of 10–11 June 2026.

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UK DEBT - THE WEIGHT OF PROMISES

9 June 2026

In Britain on the Brink we looked at Liam Halligan's analysis of UK Debt, Energy and "the Coming Crisis". In this article, we shall seek to understand why UK debt continually increases and what if anything can be done about it.

Overview

UK public debt has risen from near-zero in the mid-1970s to around £3.5 trillion today, not in a smooth line but through a series of crisis-driven jumps that reset the fiscal baseline each time. 

Beneath the headline number lies a more structural story: an ageing society, slowing productivity growth, and repeated political choices that expand long-term commitments faster than the tax base can sustainably support. 

While the language of “decline” is often invoked, the more precise dynamic is one of accumulating rigidity rather than imminent breakdown. The UK retains full monetary sovereignty and deep access to global capital markets, meaning this is not a classical solvency story, but a gradual tightening of fiscal space in which pensions, healthcare, and debt interest increasingly pre-allocate the state’s resources before any discretionary policy is even considered.

1. THE WEIGHT OF PROMISES — UK DEBT IN STRUCTURAL PERSPECTIVE

The chart is striking. From a near-zero base in the mid-1970s, UK public sector debt has climbed in three distinct lurches to reach £3,513.7 billion - more than three and a half trillion pounds. It is the kind of graph that prompts strong reactions: alarm, outrage, or, from certain quarters, dark talk of civilisational decline and wipeout. To understand what it actually shows, and what it doesn't, requires separating structural arithmetic from historical analogy.

Glossary

Structural debt – accumulated borrowing that persists across cycles rather than being temporary.
Public sector debt – total outstanding borrowing by government and related public bodies.
Civilisational decline – broad historical interpretation linking economic indicators to societal contraction.

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2. THE ARITHMETIC FIRST - WHY DEBT BECOMES STRUCTURAL

The UK has gradually evolved into a state that promises more than its economy can sustainably finance. This is not a partisan observation. Successive governments of all parties have faced the same underlying numbers.

An ageing population means rising pension, NHS healthcare, and social care costs year after year. Economic growth has slowed markedly since the 1970s, constraining the expansion of the tax base. Voters resist both higher taxes and cuts to visible public services. And politicians, operating on four- or five-year electoral cycles, have little structural incentive to address debt that accumulates over decades.

For example, the per capita monthly cost of the NHS:

Low estimate:

£2,685 ÷ 12 ≈ £224 per month

High estimate:

£2,985 ÷ 12 ≈ £249 per month

Reasonable working range: £220–£250 per man woman and child per month.

On top of this chronic mismatch, major shocks deliver step-changes. The early 1990s recession, the 2008 global financial crisis, and the 2020 Covid response each produced a permanent upward shift in debt. After each crisis, spending commitments remained elevated while growth recovery lagged.

The result is a structural deficit - a gap between spending and revenue that persists even in normal economic conditions.

Glossary

Ageing population – rising proportion of elderly citizens relative to working-age groups.
Structural deficit – persistent fiscal shortfall across the economic cycle.
Fiscal shock – sudden event that increases government spending or reduces revenue.

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3. WHY EVERY GOVERNMENT MAKES IT WORSE - POLITICAL EQUILIBRIUM

Debt accumulation is not primarily a partisan outcome. It is an institutional equilibrium.

Conservative administrations tend to prioritise lower taxation, defence spending, and protection of pensions and healthcare. Labour administrations tend to prioritise public investment and welfare expansion, while also protecting core services. Both therefore avoid confronting the largest structural spending areas.

Three underlying drivers explain persistence.

First, demographics. In 1950, around seven workers supported each pensioner. Today it is closer to three, and the ratio continues to deteriorate.
Second, deindustrialisation. Manufacturing has fallen from around 30% of GDP in the 1970s to roughly 10%, narrowing the tax base.
Third, weak productivity☆ growth since 2008, limiting wage growth and tax revenue expansion.

In combination, these forces produce a system in which spending commitments rise faster than the willingness or ability to fund them.

Glossary

Dependency ratio – ratio of non-working to working-age population.
Deindustrialisation – long-term decline in manufacturing share of the economy.
Productivity growth – increase in output per unit of labour input.

☆ Why weak productivity growth since 2008? See footnote

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4. THE IMPERIAL ANALOGY — WHERE IT HAS TRACTION

Historical parallels are often invoked because the long-run shape of debt accumulation resembles earlier imperial cycles.

Late Rome experienced shrinking fiscal capacity and currency debasement. The Spanish Empire repeatedly defaulted despite inflows of silver. The Ottoman Empire lost fiscal autonomy through foreign debt administration in the 19th century. Britain itself shifted from creditor to debtor after 1918.

The common pattern is rising structural costs, weakening revenue bases, and increasing fiscal rigidity.

In the UK context, similar features are visible. A growing share of spending is absorbed by pensions, healthcare, and debt interest before discretionary policy begins. This creates what can be described as fiscal sclerosis - increasing rigidity in public finances. Relative economic weight has also declined in manufacturing and global GDP share.

The analogy is useful as it highlights constraint, rigidity, and long-run relative decline.

Glossary

Fiscal sclerosis – progressive rigidity in government spending due to fixed obligations.
Debt interest – cost of servicing accumulated government borrowing.
Relative economic decline – fall in share of global output rather than absolute contraction.

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5. WHERE THE ANALOGY BREAKS — MONETARY SOVEREIGNTY AND MODERN FINANCE

Despite its rhetorical appeal, the imperial analogy has what you might call "structural limits".

Historical empires often lost monetary control. Rome debased currency under fiscal stress. Spain defaulted in foreign-denominated obligations. The Ottoman Empire borrowed in external currencies and lost fiscal autonomy.

The UK does not operate in that framework.

First, it is a sovereign currency issuer. Debt is denominated in sterling, and the Bank of England supports liquidity in the system.

Second, gilts are a deep global asset class held by domestic institutions and international investors. There is no immediate shortage of demand for UK debt.

Third, sterling retains reserve-currency "adjacency", giving it financial flexibility absent in most historical empires.

Additionally, modern defence commitments are heavy, but not structurally comparable to expansionist imperial militaries☆☆. NATO membership and nuclear deterrence limit fiscal exposure.

The constraint is therefore not insolvency risk in the classical sense of default or "going bust", but the rising cost of servicing debt within a low-growth economy, threatening increasing poverty and social fragmentation.

Glossary

Monetary sovereignty – ability of a state to issue and control its own currency.
Gilts – UK government bonds.
Reserve currency – widely held global currency used in trade and finance and reserves.

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6. THE REAL QUESTION - ADJUSTMENT, NOT COLLAPSE

The relevant framework is not collapse but adjustment.

Three broad paths exist.

Fiscal tightening would involve higher taxation or reduced spending, but faces political resistance. 

Growth-led stabilisation would require productivity improvement through education & technology dev. and rollout, more investment in the real including infrastructure, and institutional reform and de-regulation. 

Financial repression would involve maintaining low real interest rates relative to inflation, gradually burning off debt burdens in real terms.

The UK appears to be mixing all three, with limited success in each.

The key point is that none of these paths imply systemic failure, the failure of the system as a whole. They imply distributional choices over time ie who bears the cost of adjustment - taxpayers, savers, or future service users?

Glossary

Financial repression – suppression of real interest rates below inflation.
Real interest rates – nominal rates adjusted for inflation.
Fiscal adjustment – policy changes to restore balance between spending and revenue.

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7. ON BALANCE - STRUCTURAL STRAIN WITHOUT TERMINAL COLLAPSE

The UK exhibits features consistent with late-cycle fiscal systems: slow growth, ageing demographics, and increasing entitlement burdens.

However, it does not exhibit classical end-of-empire failure modes such as loss of monetary control, external fiscal domination, or inability to refinance debt in domestic currency.

The outcome is more consistent with long-term fiscal compression than abrupt crisis. Living standards and fiscal flexibility may erode gradually, but within a framework of institutional continuity.

The £3.5 trillion debt is therefore best seen as a constraint on the future policy space rather than a precursor to systemic collapse.

The key issue is not whether the system breaks, but how the adjustment burden is distributed across time and social groups, if a fourth turning is to be headed off before collapse.

Glossary

Fiscal compression – long-term tightening of available public spending space.
Policy space – range of feasible government fiscal options.
Institutional continuity – persistence of core state structures despite economic change.

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Footnotes

☆ Why weak productivity growth since 2008?

The 2008 crisis triggered a prolonged period of cheap credit that kept "zombie" firms alive - businesses too weak to invest or innovate but able to service debt at near-zero rates, dragging down economy-wide productivity. 

At the same time, the UK's particular mix of post-crisis austerity and weak business investment starved the economy of the capital deepening - esp. better machinery, technology, infrastructure - that normally drives output per worker higher. 

Underlying this was a structural shift: an economy increasingly weighted toward low-productivity services, retail, and hospitality rather than high-value manufacturing or R&D-intensive industries.

So the UK became a financialised economy ie consumption-lead, debt-driven economy, rather than a real economy ie production and investment economy.

This is precisely the financialisation thesis at the heart of this blog's core argument. 

When an economy prioritises consumption, property, and financial services over production and capital investment, it generates wealth on paper but hollows out the real productive base that sustains long-run growth, wages and tax revenues. The UK became, in effect, a leveraged consumer - borrowing against rising house prices to fund living standards that the underlying economy could no longer organically support. 

This is why the debt chart and the productivity chart are really the same story told twice. And why a possible solution to the financialisation debt trap would reverse this - fiscal prudence, real wage increases, and investment for reshoring and growth of the real economy... is it too late?

☆☆ Modern defence commitments are heavy, but not structurally comparable to expansionist imperial militaries

The data supports the point clearly. UK defence spending stood at 3.3% of GDP in 1990-91 and has since fallen to around 2.3% (Institute for Fiscal Studies) - despite current pressures to rebuild. Compare that to the Roman or Spanish imperial military burden, which routinely consumed 50–70% of state revenues. 

Current UK spending is around 2.4% of GDP, with commitments to reach 3.5% by 2035 (House of Commons Library) - significant, but a managed collective obligation shared across NATO allies, not the open-ended unilateral cost of empire.

And America?

America is the exception that proves the rule - and arguably the last empire still paying the full unilateral cost.

US defence spending runs at around 3.5% of GDP, but that figure understates the true burden when you add veterans' benefits, intelligence agencies, foreign military aid, and the nuclear arsenal maintenance. More structurally, the US maintains approximately 750 military bases in 80 countries - a global garrison posture with no historical peacetime parallel. The fiscal consequence is visible: US defence spending is the single largest discretionary item in the federal budget, and cumulative post-9/11 war costs have been estimated by Brown University's Costs of War project at over $8 trillion.

The irony is that NATO, from a European perspective, has been a mechanism for offloading precisely this imperial overhead onto American taxpayers - which is the real grievance behind Trump's burden-sharing complaints, whatever you may think of his manner of expressing it.

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BRITAIN ON THE BRINK

31 May 2026

Britain on the Brink: Liam Halligan on Debt, Energy and the Coming Crisis

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1. The Debt Emergency

Britain's public finances are in systemic distress. In February 2026 alone, the government borrowed £14.3 billion, of which £13 billion went on debt interest payments. Long-term gilt yields are now at their highest levels since the aftermath of the 2008 financial crisis, even as the Bank of England cuts its policy rate.

This unusual divergence suggests that financial markets are becoming increasingly sceptical about Britain's ability to control inflation and stabilise its finances. The UK now pays more to borrow than several countries once regarded as financially fragile, including Greece and Morocco. In this environment, the judgement of global bond markets matters more than decisions made by Threadneedle Street.

Glossary

Gilt – A UK government bond used to finance public borrowing.

Yield – The return demanded by investors for lending money.

Debt interest – The cost of servicing existing government debt.

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2. The Political Class Has Lost Touch with Markets

When Labour entered office in 1997, memories of Britain's 1976 IMF crisis remained vivid. Senior figures ensured that experienced market practitioners remained close to government decision-making.

According to Halligan, that instinct has largely disappeared. He argues that today's political leadership contains too few people with practical experience of running businesses, managing investment risk or responding to market pressures. The result is a political culture that struggles to understand how investors react to fiscal and economic policy.

The deeper concern is not any individual minister but a wider political and media establishment that appears unable to discuss reducing the growth of public spending without treating it as politically impossible.

Glossary

Fiscal policy – Government decisions on taxation and spending.

Market confidence – Investor belief that a government can manage its finances responsibly.

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3. The Tax Burden Reaches a Modern Peak

Britain's overall tax burden has reached its highest level in roughly three-quarters of a century.

Recent measures, including higher employer National Insurance Contributions, reduced tax thresholds, changes to agricultural and business property relief, and penalties associated with electric vehicle mandates, have increased costs across the economy.

Critics argue that these measures are placing particular strain on small and medium-sized enterprises while simultaneously reducing opportunities for younger workers. Youth unemployment has risen sharply, and lower employment thresholds mean that businesses incur payroll taxes much earlier than before.

The concern is that policies designed to raise revenue may ultimately reduce economic activity and weaken the tax base itself.

Glossary

SME – Small and medium-sized enterprise.

National Insurance – Payroll tax used to fund state benefits and public services.

Tax base – The economic activity from which governments collect tax revenue.

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4. The Ghost of 1976

Britain's IMF crisis of 1976 remains one of the most important turning points in modern British economic history.

Facing a collapse in confidence, the government was forced to seek external financial support. The IMF required spending reductions and economic reforms in exchange for assistance. The political damage was profound and helped reshape British politics for a generation.

Today's circumstances differ, but Halligan sees an important parallel. The constraint no longer comes from formal international institutions but from global bond markets. When governments ignore financial realities, investors eventually impose discipline through higher borrowing costs.

Similar dynamics have occurred in countries such as Ireland, Italy and Greece during the past two decades.

Glossary

IMF – International Monetary Fund, a lender of last resort for sovereign states.

Sovereign debt – Money borrowed by national governments.

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5. Index-Linked Debt: Britain's Hidden Vulnerability

One of Britain's least discussed financial vulnerabilities is the unusually large share of index-linked government debt.

About a quarter to a third of UK government borrowing is linked directly to inflation. This proportion is significantly higher than in most advanced economies.

The consequence is a dangerous feedback loop. When inflation rises, debt servicing costs rise automatically. Higher interest costs require additional borrowing, which can further undermine confidence in public finances.

Compounding the problem is the changing ownership of British government debt. Domestic pension funds, once major long-term holders of gilts, play a smaller role today. Increasingly, ownership rests with international investors and financial institutions whose commitment depends entirely on returns rather than national interest.

Glossary

Index-linked debt – Bonds whose payments rise with inflation.

Feedback loop – A process in which an effect reinforces its original cause.

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6. Energy Policy and Economic Competitiveness

Energy remains central to Britain's economic challenges.

The UK imports significant quantities of oil and gas despite possessing substantial North Sea resources. Gas storage capacity is limited compared with major European economies, leaving the country more exposed to supply disruptions.

Meanwhile, North Sea tax revenues have fallen dramatically as investment has weakened. Critics argue that high windfall taxes discouraged new development, reducing future production and government income simultaneously.

The automotive sector faces additional pressure from electric vehicle mandates. Manufacturers must balance regulatory requirements, consumer demand and international competition at a time when the industry is already undergoing significant structural change.

The broader criticism is that energy policy has become disconnected from economic competitiveness and energy security.

Glossary

Windfall tax – An additional tax on unexpectedly high profits.

Energy security – Reliable access to affordable energy supplies.

ZEV mandate – Regulations requiring a growing proportion of vehicle sales to be zero-emission.

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7. The Strait of Hormuz and the External Shock

Around one-fifth of global oil and gas trade passes through the Strait of Hormuz, making it one of the world's most strategically important maritime chokepoints.

Any prolonged disruption affects not only energy prices but also fertiliser production, transportation costs and food prices. Because supply chains operate with delays, the economic consequences often emerge weeks or months after the initial disruption.

Britain enters such a scenario from a position of relative vulnerability due to its dependence on imported energy and limited storage capacity.

The concern is that an external energy shock could arrive just as public finances and economic growth are already under pressure.

Glossary

Strait of Hormuz – Narrow waterway connecting the Persian Gulf to global shipping routes.

Supply shock – A sudden reduction in the availability of goods or resources.

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8. Is There a Way Out?

Halligan's proposed solutions begin with spending restraint rather than immediate tax reductions.

He argues that restoring fiscal credibility requires demonstrating control over government expenditure before attempting significant tax cuts. Other proposals include raising the VAT threshold, reducing regulatory burdens on smaller firms, encouraging investment, and making more productive use of publicly owned land.

Whether such reforms are politically achievable remains uncertain. Halligan's central argument is that meaningful change is unlikely until financial markets force a reassessment of current policies.

History suggests that governments often postpone difficult decisions until external pressures leave them with no alternative.

Glossary

VAT threshold – The turnover level at which businesses must register for Value Added Tax.

Fiscal credibility – Market confidence in a government's financial management.

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9. The Consent Problem

Beneath the economic arguments lies a deeper political concern.

Modern democracies depend not only on elections but also on public trust that institutions are broadly competent and responsive. When citizens repeatedly experience financial crises, declining living standards and policy failures, confidence gradually erodes.

The growing support for insurgent political movements across the political spectrum may reflect less a shift in ideology than a search for alternatives. Voters who feel ignored by established parties often look elsewhere, regardless of whether those alternatives ultimately succeed.

Economic indicators can measure debt, inflation and growth. Public consent is harder to quantify. Yet history suggests it may be the most important variable of all.

Glossary

Political consent – Public acceptance of the legitimacy and effectiveness of governing institutions.

Insurgent parties – Political movements challenging established parties and institutions.

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References

Liam Halligan interview and commentary, 2026.

UK Office for National Statistics (ONS)

UK Debt Management Office (DMO)

Bank of England

International Monetary Fund (IMF)

UK Office for Budget Responsibility (OBR)

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THE CRASH OF 5 JUNE 2026 THE JOBS REPORT WAS MISINTERPRETED

8 June 2026

THE CRASH OF 5 JUNE 2026: WAS THE JOBS REPORT TELLING THE WRONG STORY?

Overview

The June payroll report was read by markets as a sign of economic resilience. The headline number reinforced the narrative of a still-robust US labour market.

Yet the underlying detail suggests a more fragile picture.

Hiring remains subdued relative to vacancies, pointing to reduced labour market dynamism. Workers are less willing to quit, indicating lower confidence and weaker bargaining power. Real wages are struggling to keep pace with inflation, eroding purchasing power. Household savings buffers continue to decline, leaving consumption increasingly exposed to income shocks.

At the same time, much of the employment growth is concentrated in relatively defensive or low-productivity sectors, rather than broad-based private sector expansion.

None of this implies an imminent recession. The payroll data still signals positive job creation.

But it does suggest that the labour market may be materially weaker than the headline figure of 172,000 jobs implies.

Markets focused on the number. The more important signal may lie in the composition and quality of the jobs being created, and the financial resilience of the households filling them.

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1. A Strong Jobs Report That Shocked Markets

On 5 June 2026 financial markets suffered a sharp reversal after the release of the latest US Non-Farm Payrolls (NFP) report. We covered the market's response here, but on further reflection, was the jobs report telling the wrong story?

Economists had expected around 80,000 new jobs. Instead, payrolls increased by 172,000, more than double expectations.

The market's reaction was immediate.

• Stocks fell.

• Bond yields surged.

• The US dollar strengthened.

• Gold weakened.

Investors concluded that a stronger labour market would reduce the likelihood of Federal Reserve rate cuts and might even increase the possibility of future rate rises.

The message seemed straightforward:

A strong economy means tighter monetary policy.

Yet a closer examination of the labour market data suggests that the headline figure may have concealed a very different reality.

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2. Job Openings Are Not Jobs

One of the arguments supporting the "strong economy" narrative came from the latest Job Openings and Labor Turnover Survey (JOLTS).

Job openings rose to 7.6 million, the highest level since mid-2024.

At first sight this appears encouraging.

However, a vacancy is not the same as a hire.

Employers can advertise positions without immediately filling them.... many of these openings are dubious.

The more meaningful measure is the relationship between job openings and actual hiring.

When viewed in this way the picture becomes less impressive.

Hiring fell sharply during the month and the number of hires per vacancy dropped to its lowest level in more than two years.

In other words, firms appear willing to advertise jobs but increasingly reluctant to recruit.

That is not normally the behaviour associated with a rapidly expanding economy.

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3. Workers Do Not Behave As If The Labour Market Is Booming

Perhaps the most revealing labour market indicator is not payroll growth but the quits rate.

People voluntarily leave jobs when they are confident that better opportunities exist elsewhere.

Historically, a high quits rate has been associated with strong wage growth and a tight labour market.

Today the opposite is happening. The quits rate has fallen close to its lowest level since 2020.

Workers appear increasingly cautious about changing employers.

At the same time wage growth is slowing.

Once inflation is taken into account, real earnings have turned negative. Nominal wages are still rising, but purchasing power is falling.

If the labour market were genuinely overheating, one would normally expect workers to feel confident enough to move jobs and demand higher pay.

The current data suggest otherwise.

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4. Looking Beneath The Payroll Headline

The composition of job growth may be as important as the headline number itself.

A large proportion of recent employment gains came from three areas:

• Leisure and hospitality.

• Local government.

• Education and healthcare.

• Leisure and hospitality hiring appears to have been boosted by preparations for the upcoming FIFA World Cup.

Many of these jobs are temporary, part-time and relatively low paid.

• Local government employment is often considered a lagging indicator, tending to remain strong even as the private sector slows.

• Healthcare and education continue to generate jobs, largely reflecting demographic trends and an ageing population rather than accelerating economic growth.

By contrast, many traditionally cyclical sectors showed little strength.

• Construction growth was modest.

• Manufacturing barely expanded.

• Finance lost jobs.

Several sectors closely linked to business investment and economic confidence remained weak.

The labour market may therefore be growing, but not necessarily in the areas normally associated with a booming economy.

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5. The Consumer Is Under Pressure

The most important issue may not be employment itself but what is happening to household finances.

Inflation continues to outpace wage growth. As a result, real purchasing power is declining.

When households face this situation they have only three choices.

• They can spend less.

• They can reduce savings.

• Or they can increase borrowing.

Recent data suggest that Americans are doing all three.

• The savings rate has fallen close to historic lows.

• Consumer credit continues to rise.

• Meanwhile consumption, which accounts for ~two-thirds of US economic activity, has been contributing less and less to GDP growth.

This matters because a consumer-led economy ultimately depends on consumers having sufficient purchasing power.

A jobs market that produces employment but fails to improve living standards may be less healthy than the headline numbers imply.

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6. Why Markets Reacted Anyway

Financial markets focus on what central banks are likely to do next.

The payroll report appeared strong enough to persuade investors that the Federal Reserve may need to keep interest rates higher for longer, some analysts even suggesting at the Fed it would raise rates by 1/4% this year.

That alone was sufficient to trigger a repricing.

• Stocks fell because higher interest rates reduce valuations.

• Bond prices fell because yields rose.

• The dollar strengthened because higher rates attract international capital.

• Gold weakened because rising real yields increase the opportunity cost of holding non-yielding assets.

Whether the labour market is genuinely strong may ultimately be less important in the short term than how the Federal Reserve interprets the data.

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7. Conclusion: Strong Headline, Weak Foundations?

The market viewed the June payroll report as evidence of economic strength. The details tell a more nuanced story.

• Hiring remains weak relative to vacancies.

• Workers are reluctant to quit.

• Real wages are falling behind inflation.

• Consumer savings are being depleted.

• Many of the new jobs are concentrated in sectors that do not necessarily signal broad economic expansion.

None of this proves that a recession is imminent. Nor does it mean the payroll report was meaningless.

It does suggest, however, that the labour market may be considerably weaker than the headline figure of 172,000 jobs implies.

The market focused on the number. Investors may eventually need to pay more attention to the quality of the jobs being created and the financial condition of the people filling them.

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Glossary And Further Considerations

Non-Farm Payrolls (NFP) – Monthly estimate of US employment excluding farm workers.

JOLTS – Job Openings and Labor Turnover Survey.

Quits Rate – Percentage of workers voluntarily leaving their jobs.

Real Wages – Wage growth after adjusting for inflation.

Labour Force Participation Rate – Percentage of working-age people employed or actively seeking work.

U-6 Unemployment – Broader measure of unemployment including underemployed and discouraged workers.

Full-Time Versus Part-Time Employment – An important distinction because part-time job growth may not reflect the same economic strength as full-time job growth.

Household Survey Versus Establishment Survey – Two separate employment surveys whose growing divergence has raised questions among some analysts.

Personal Savings Rate – The proportion of disposable income being saved rather than spent.

Consumer Credit Growth – Rising borrowing can temporarily support spending but may create future financial stress.

PPI-CPI Spread – The gap between producer inflation and consumer inflation, often used as an indicator of margin pressure within the corporate sector.

Yield Curve Flattening – A narrowing gap between short-term and long-term interest rates, sometimes associated with slowing economic growth.

Demand-Pull Versus Supply-Driven Inflation – A key debate regarding whether inflation is caused by excessive demand or by supply constraints such as energy costs.I think this version is much closer to the style and length of your strongest LivingInTheAir articles. It is about 1,150 words, has one clear thesis, and leaves enough space for readers to think rather than overwhelming them with data.

References

US Bureau of Labor Statistics (NFP, JOLTS data): https://www.bls.gov⁠�

Federal Reserve Economic Data (FRED): https://fred.stlouisfed.org⁠�

Blanchard, O. (macro labour market dynamics, MIT Press)

Bernanke, B. (labour market slack and monetary policy essays)

IMF World Economic Outlook (labour market cycles and inflation linkages)

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