Markets may be entering a period of sustained volatility, according to the BlackRock Investment Institute, which cites the delayed impact of US tariffs and deepening conflict in the Middle East as key drivers.
Senior economist Nicholas Fawcett said in the firm’s latest commentary that these pressures are fuelling inflation uncertainty and narrowing the options available to central banks.
Recent economic indicators point to growing instability, even before the full effect of tariffs has taken hold. US consumer price inflation for May came in lower than forecast, but Fawcett highlighted volatility beneath the surface.
“Volatile economic data, like the CPI, is reinforcing our view that we are in a regime of greater macro volatility,” he said.
While overall inflation appeared subdued, specific categories such as appliances have started to show price increases tied to tariff impacts. Still, many firms are waiting for more clarity on trade policies before passing on costs.
“The data showed signs of tariffs starting to lift consumer prices, like for appliances, but the full impact is still to come,” Fawcett noted.
“Surveys by the National Federation of Independent Business suggest companies are ready to hike prices in response to tariffs, but they may delay that and workforce changes as they await clarity on tariffs.”
The geopolitical situation is adding to this uncertainty. Last week, Israel launched a major strike on Iran’s nuclear infrastructure, sending crude oil futures up 11% and pushing prices to a five-month high.
BlackRock sees the escalation as a possible inflation driver, especially if it endangers shipping routes or critical infrastructure. “Should the conflict affect the security of critical trade routes, supply disruptions could add to inflation pressures,” Fawcett said.
The combined pressure from trade and geopolitical risks is complicating central bank decision-making. In the US, the Federal Reserve has little room to move. Wage growth remains elevated, keeping inflation from returning to the 2% target despite easing headline numbers.
The gap between core inflation and wage increases is now the widest in four years. “We see uncertainty around the economic impact of tariffs and inflation volatility keeping the Fed on hold for now – including at this week’s meeting,” Fawcett said.
He added that longer-term inflation pressure from tariffs and tight labour markets will likely limit how far the Fed can cut rates, even if supply disruptions hurt growth.
The European Central Bank is in a slightly different position.
It cut rates recently but signalled a pause amid weaker growth forecasts for 2025. While tariffs are seen as less inflationary in Europe, the region remains vulnerable to knock-on effects from energy prices and slower global trade.
According to BlackRock, the ECB has more scope to ease policy than the Fed, helped by falling energy costs and weaker wage growth.
Despite the turbulence, BlackRock remains positive on risk assets, particularly in US equities. It sees structural trends like artificial intelligence and demographic change supporting the market.
“That’s why we keep our risk-on stance and an overweight to US stocks on a tactical six- to 12-month horizon, supported by mega forces like AI,” Fawcett said.
In fixed income, the firm is underweight long-term US treasuries and favours inflation-linked bonds, which it believes still underestimate long-term inflation pressures.
In private markets, BlackRock prefers floating-rate credit and infrastructure investments, which it sees as better suited for inflationary periods.
“We favour infrastructure equity, like stakes in airports and data centres: its returns are buffered from inflation and it outperforms amid supply constraints and high inflation,” Fawcett said.
He expects volatile data and pricing instability to persist, driven by supply disruptions, evolving trade dynamics and geopolitical fragmentation.
“Noisy economic data reflect the volatile new regime we’ve long noted,” he said. “We expect this to persist.”