Markets in a Minute: Inflation, interest rates and AI shape a surprisingly resilient August
September 2026
August proved more eventful than the traditionally quieter summer period. Investors had to contend with renewed tensions in the Middle East, higher oil prices, persistent inflation and a further rise in government bond yields. Central banks remained caught between inflation, which remains above target, and signs of softer growth and employment. Meanwhile, concerns around government borrowing returned. Despite this backdrop, global equity markets remained resilient, supported by strong company results and renewed enthusiasm around artificial intelligence and technology.
Inflation keeps central banks cautious
- Inflation remained a key concern in August. In the US, headline inflation was 3.7% year-on-year, while underlying inflation remained elevated at 3.3%, reinforcing the view that price pressures have not yet been fully brought under control.
- Federal Reserve Chair Kevin Warsh struck a firmer tone at the 2026 Jackson Hole Economic Symposium, warning that further progress on inflation was needed. Markets consequently increased expectations that US interest rates could rise again in September.
- The Bank of England faced a similar challenge. UK inflation increased to 2.9% from 2.6%, despite signs of a softer labour market and weaker consumer activity.
- UK growth was more encouraging, with the economy expanding by 0.4% during the second quarter, leaving policymakers balancing persistent inflation against a relatively subdued growth outlook.
Bond yields rise as borrowing concerns return
- Government bond yields moved higher across several major markets as investors focused on persistent inflation, higher energy prices and the amount of debt governments need to issue.
- In the US, the 30-year Treasury yield moved above 5%, reaching its highest level since 2007, while the 10-year yield ended August at around 4.75%. UK government bonds also came under pressure, with the 10-year gilt yield rising to 5.14% from 5.05% during the month.
- Japan experienced a more significant move, with its 10-year government bond yield approaching 3%, a level not seen for around 30 years, as investors continued to expect further interest-rate increases from the Bank of Japan.
Rising bond yields increase the cost of additional government borrowing, putting further pressure on public finances and potentially limiting how much governments can spend elsewhere.
Geopolitical risks return to focus
- Hopes of a more lasting ceasefire in the Middle East faded during August as tensions between the US and Iran increased and fighting in the region resumed
- Oil prices initially fell as prospects for diplomacy improved, before reversing sharply and moving back above $90 a barrel towards the end of the month
- Higher energy prices added another potential source of inflation at a time when central banks were already struggling to bring price pressures fully under control
- Away from the geopolitical backdrop, economic conditions remained mixed. US activity was relatively resilient and parts of Europe showed signs of gradual improvement. China continued to face weaker domestic demand and challenges within its property sector.
Global equity markets remained resilient despite the more difficult backdrop. Strong company results and continued investment in artificial intelligence helped support sentiment, particularly across US technology companies. Asian markets also recovered as investors returned to semiconductor businesses following weakness in July, with Japan among the stronger-performing developed markets. UK and European equities delivered more modest gains but nevertheless ended August higher.
Fixed income markets faced a more challenging month as government bond yields rose. Persistent inflation, higher oil prices and concerns surrounding government borrowing weighed particularly on longer-dated bonds in the US, UK and Japan. While rising yields can create short-term pressure on bond prices, they also mean investors are now being offered a higher level of income than has been available for much of the past decade.
Commodity markets reflected the increase in geopolitical and inflation uncertainty. Gold rose by around 9% during August, benefiting from demand for assets traditionally viewed as a store of value during uncertain periods. Oil was volatile but ultimately finished the month little changed, despite falling earlier in August before renewed Middle East tensions pushed prices back above $90 a barrel. Property and other interest-rate-sensitive assets continued to face a more challenging environment as higher bond yields increased financing costs.
What does this mean for investors?
August was a useful reminder that markets rarely move in a straight line. Inflation remains stubborn, interest-rate expectations continue to shift and geopolitical events can quickly affect energy prices and investor sentiment. Yet, despite a more challenging backdrop, global equity markets remained resilient.
For long-term investors, periods like this reinforce the importance of looking beyond individual headlines. Different asset classes, sectors and regions will respond differently as economic conditions change. While higher bond yields have created pressure in some areas, for example, they have also improved the income available from fixed-income investments.
Trying to anticipate every change in interest rates, inflation or geopolitics can be difficult and can encourage short-term decisions. A well-diversified portfolio, aligned to your objectives and attitude to risk, is designed with periods of uncertainty in mind.
As ever, we continue to monitor markets and portfolios carefully. If recent market developments have prompted questions about your investments or wider financial plans, please contact us.