Blain’s Morning Porridge 8^th Sept, 2026 – Inflation, Rates and Economic History provide clues on the Outlook

“If I was trying to get to there, I would not be starting from here.”

The coming year is likely to be shaped by higher inflation from energy and El Nino, rising interest rates, “policy-mistake” risks, and revaluation risks as capital markets adapt to rate normalisation. Looming over it all be political noise. Understanding where we are, how we got here and what happens next will be critical.

LINK TO PODCAST

Key Takeaways:

• Inflation is likely to remain “elevated” through 2027 – leading to multiple market consequences and revaluation threat.
• Interest rates will likely stay on a rising path – with elevated “policy-mistake” risk in the UK as inflation and slowing growth collide.
• The UK’s economic problems are the consequences of long-term economic history and accumulated economic weaknesses resulting from successive government policies.
• The USA is economically robust but faces threats from Chinese competition in it core hi-value tech markets and the potential of hegemonic decline.
• Rising US rates may weaken the capital markets that have driven US success, but are more likely to trigger a fundamental reassessment of value – corrective.
• Trying to sort out broken economies and fractured politics will prove difficult – it may be time to give Neo-Keynesian fiscal polies and investment a try… why not? Nothing else is working.

The trajectory of US and UK interest rates is not looking good.

It’s likely we will see the Bank of England hold interest rates steady this month, but over the next year the market is expecting the current 3.75% base rate rise by 25-50 bp through one or two hikes. The Fed is leaning towards a 25 bp hike this month, followed by another, raising US rates to 4.25% in next 6-9 months.

Both economies face significantly different issues, but in both cases the primary reason for rising rates is rising inflation. In the US the economy is running hot. In the UK we’re not entirely sure if it is running at all. (Yesterday the UK’s largest manufacturer, Jaguar LandRover announced 4000 redundancies. That’s largely because its Indian owner has cut costs, run it into the ground, and they build crap cars that breakdown with monotonous regularity. LandRover offer 2 year warranties. The latest Chinese models, including the UK’s bestselling Jaewoo7, offer 7-10 years.)

For the UK there is a significant “policy-mistake” risk – that raising rates into exogenous inflation and an already weakening economy could trigger recession/stagflation. Ouch!

Predicting interest rates is never easy – with hindsight we can see rates move in cycles and have clear trigger moments, but spotting these is never easy. Who would have thought America would be still be fighting in the Gulf 6 months after Trump declared victory?

The clear cause of rising inflation are the knock-on effects of rising energy prices. Russia’s attack on Ukraine triggered the first oil-shock 4 years ago, and today Oil prices are nudging through $100 on the back of the Iran War.

The developing El Nino will trigger substantial inflation across agricultural commodities which will be felt through the next year – meaning there are limited prospects for inflation to fall. There will be immediate effects on sectors like energy prices and insurance as storms and flooding hits, delayed effects where drought occurs, and longer terms where the rising price of feed means rising protein costs may take a year or so to work through. Expect the cost of everything from coffee, chocolate and tropical fruit to all rise.

Rising inflation and therefore rates through 2027 look nailed on.

The real question is how resilient will nations be to the consequences of rising rates? We have political “frictions” in both the UK and US to consider. To understand why, it’s critical to acknowledge where both economies are.

A potted economic history of the UK:

Despite the front pages of the Torygraph declaring new premier Andy Burnham has single handedly destroyed the UK economy in less than 2 months… it’s been a long time happening.

The UK is struggling with the consequences of being the UK. It is a story of long-term economic rise and fall over centuries. For the course of the 19^th Century Great Britain was the global hegemonic economic power with a vast internal market around the Empire for its goods and services – which made it rich and powerful (and economically flabby). The wars of the 20^th Century nearly bankrupted it. In the new reality which followed 1945 saw an exhausted and smaller Britain outcompeted in global markets causing it to switch from trade with the post-war Commonwealth towards a closer relationship with European markets – finally joining the Common Market (the EU) in 1973.

But Britain never got comfortable with the idea of being part of a European unity and especially not the concept of a European polity. After all, for centuries British foreign policy was to ensure no other European power would ever rise to become a regional hegemon that might challenge Britain’s global trade.

It took over 40 years, but the UK’s hankering for past glories, the Dunkirk spirit (a national tendency to celebrate defeat and standing alone), distrust of Johnny Foreigners (especially those with French accents), the rise of proto-populists like Farage (who made his name baiting the European Parliament), plus dreams of a long-gone restoration of British global trade led to lemming-like Brexit vote.

Today the UK is hobbled by endogenous economic threats. Those of its own making include the economic handbrake of Brexit and the long-term dither of UK politicians to address infrastructure issues like housing (the lack of affordable and social homes), the enormous costs of the NHS, the failure to rebuild national utilities:  our railways are basically 200-100 years old, while the privatisation of water & sewerage has left them in even worse shape. And there are the escalating costs of education, defence, and welfare where the costs are increasingly rising, but they apparently deliver less and less.

These are the consequences of decades of political decisions by parties of both hues. But perhaps the biggest problem will be populism – promising unlikely solutions which will only make it worse…

I was watching some Wasps in the back garden yesterday. At the end of summer wasp colonies break down in social disorder – without a queen to lay eggs, the workers have nothing to do, so they leave the decaying nest and predate picnics for food, or get drunk on rotting fruit. That is why they get so annoying and stingy at this time of year.

The Wasps made me think of the UK.

The social problems so visible in the crime waves that ravage low income cities like Warrington, or black balaclava wearing thugs and flash-mobs threatening illegal aliens, the collapse of faith in the police (who are under-resourced to deliver so no one is punished for social crimes), and the vast numbers of young people on welfare not in jobs or training, leaves generations underemployed or with nothing else to do and looking to blame the authorities for their lawlessness.

Maybe Reform are right? Maybe we should give them purpose, conscript, train and despatch them to serve at His Majesty’s Command? Probably not. The idea of converting louts into trained thugs with combat skills might not be a good one – unless the economy changes. Best idea may well be to slash welfare and create growth… simples eh?

As I’ve written many times, I am never surprised at headlines in The Daily Torygraph about the imminent collapse of the Gilts market. That’s what the right-wing owners pay the writers to spout. The current narrative to plug is that the UK is walking blind and ignorant into a “debt trap,” as rising interest rates push the cost of government borrowing to unsustainable levels. Debt servicing costs are increasing faster than growth – which is probably true as growth is so lethargic. But bear in mind the average duration of UK debt is long, and around 80% of the current outstanding debt was issued when bond yields were close to zero during Covid. The right wing has an agenda to push – and if Gilts collapse under Labour that’s a win for them. (Massive crisis for those of us who live here!)

If the UK were a house, it would need a complete refit. There is enough in the piggy bank for a couple of tins of paint – but the owners are prepared to kill each other over what colour it should be…

What about the USA?

The USA may be on the verge of experiencing the delights of hegemonic decay much as the UK did. Today it dominates the key sector of global growth – tech, through AI and everything around it. But that may be a false certainty. The apparent value of AI is seen in the extraordinary valuations of American companies, which are fuelled by the “abundance” of the highly liquid capital markets ability to fund everything and anything. The depth of that capital market is largely due to nearly 20 years of extraordinarily cheap money through post Global Financial Crisis QE and then Covid keeping rates artificially low.

As rates normalise to higher levels over the coming 12 months, it could prove the sand in the engine moment – causing the AI infrastructure spend that’s driving the economy and expectations to stall. Or, more likely, it will focus the market back on the reality of what works and what is merely speculative in a normalised interest rate environment. That then leaves the main threat to the US economy as competition from China – which is showing it is now competing head-to-head in tech sectors.

Maybe its time to think of serious alternatives…? Like time to get out the Boys and Girls Bumper Book of Keynesian Economic Puzzles and Games?

Out of time and back to the day job…

Bill Blain

Author of the Morning Porridge
CEO Windshift Capital
Advisor – Spitfire Strategic Capital

Meanwhile, don’t forget about my new book: The Battle for Hamble

You can read a review on the Society of Professional Economist’s website here.