Remember when everyone seemed convinced that inflation was about to explode again? A couple of years back, some of the sharpest minds in finance were sounding the alarm, warning that prices would keep climbing and that holding long-term bonds was a terrible idea. They pointed to massive government spending, ongoing deficits, and even the risk of dollar weakening as surefire triggers for higher inflation. Yet here we are, heading into the end of 2025, and those dire predictions haven’t quite played out the way many expected.
It’s easy to look back now and wonder what went wrong with those forecasts. In my view, the issue wasn’t that these experts lacked insight—they’re incredibly accomplished—but rather that they underestimated some deep-rooted structural forces holding inflation back. These aren’t flashy or immediate factors; they’re slow-moving, almost invisible weights on the economy that make sustained high inflation much harder to achieve than it seems.
The Big Picture Behind Subdued Inflation
At its core, inflation boils down to a simple imbalance: when demand for goods and services outstrips supply, prices rise. That’s Economics 101. But in a modern, highly indebted economy like ours, creating that kind of persistent demand surge isn’t as straightforward as it once was. Many of the loudest inflation warnings overlooked how certain realities actively work against runaway price pressures.
I’ve always found it fascinating how quickly opinions can shift in financial circles. One moment, the narrative is all about impending doom from too much money chasing too few goods; the next, we’re back to worrying about sluggish growth. Perhaps the most interesting aspect is that both views can feel convincing at the time, yet only one tends to align with longer-term trends.
Money Creation Isn’t What Most People Think
One common misconception that fueled a lot of those inflation fears was the idea that governments were simply “printing money” on a massive scale, which would inevitably devalue the currency and drive prices higher. It sounds logical on the surface—if there’s suddenly way more money floating around, each dollar should buy less, right?
But the reality of how money enters the economy is more nuanced. In today’s system, most new money isn’t printed by central banks and handed out; it’s created through lending by commercial banks. When businesses or consumers borrow to invest or spend, banks create deposits in the process. No printing press required.
This means money supply tends to grow in step with genuine economic activity. During booms, credit expands, and so does the money supply. During slowdowns, lending dries up, and money growth slows—even if the central bank is trying to stimulate things.
Loans create deposits—it’s that straightforward.
We saw this clearly after the financial crisis and again during the pandemic response. Central banks expanded their balance sheets dramatically, but broad money growth didn’t explode until credit demand picked up. And when the temporary stimulus faded, the extra money didn’t keep circulating at the same pace.
Looking at measures like M2 relative to GDP reinforces this. Historically, they’ve moved together fairly closely. Spikes happen, but they tend to normalize as economic conditions shift. Right now, that ratio is actually trending lower, which hardly screams impending inflation crisis.
The Heavy Anchor of Debt
Let’s talk about debt, because this is one of the biggest factors that inflation forecasters often downplay. Total debt in the economy—government, corporate, household—has reached levels that are hard to overstate. When debt is this elevated relative to output, it acts like a drag on growth rather than a booster.
Why? Every dollar borrowed today has to be repaid tomorrow, plus interest. That means more of future income goes toward servicing obligations instead of new spending or investment. It’s a subtle but powerful shift: high debt loads make economies less responsive to stimulus and more prone to slowdowns.
In my experience following markets, periods of rapid debt buildup rarely lead to sustained inflation. More often, they set the stage for deflationary pressures when borrowing finally hits a wall. Think about Japan over the past few decades—massive debt, persistent deficits, yet stubbornly low inflation.
- Higher interest payments crowd out productive spending
- Consumers become cautious about taking on more leverage
- Businesses prioritize balance sheet repair over expansion
- Governments face rising borrowing costs that limit fiscal options
All of these dynamics work against the kind of demand explosion needed for lasting inflation. Instead, they create a environment where growth stays modest and price pressures remain contained.
Deficits: Necessary but Costly
Annual budget deficits have become the norm rather than the exception. Trillion-dollar shortfalls are now projected as far as the eye can see. While deficits can provide short-term support during downturns, chronic ones come with long-term consequences.
The key point here is that deficit spending is funded by borrowing, which adds to the overall debt burden we just discussed. More borrowing means more future interest expense, which in turn eats into resources that could otherwise fuel genuine growth.
Interestingly, when deficits shrink relative to the economy, it’s usually because growth is strong enough to boost tax revenue. That’s when inflationary risks can actually rise. But in our current setup, deficits are expanding alongside sluggish growth—a recipe for stagnation, not overheating.
It’s a bit counterintuitive at first. Many assume bigger deficits automatically mean more inflation. Yet the evidence suggests the opposite when debt levels are already strained: deficits become a symptom of weakness rather than a driver of strength.
The Quiet Power of Demographics
If debt and deficits are visible challenges, demographics might be the most overlooked. The population is aging rapidly. Birth rates have declined. Workforce growth is slowing. Immigration flows have moderated. These aren’t headline-grabbing developments, but their economic impact is profound.
Older populations tend to spend less and save more. They buy fewer homes, take fewer loans, and live on fixed incomes. Retirees draw on entitlements rather than contributing through labor and taxes. All of this reduces overall demand and economic velocity—the speed at which money changes hands.
Meanwhile, programs like Social Security and healthcare for seniors consume an ever-larger share of the budget. That increases deficits, which circles back to higher debt. It’s a reinforcing loop that pushes toward lower growth and disinflation over time.
- Fewer working-age people supporting more retirees
- Lower consumption of big-ticket items
- Reduced innovation and productivity growth
- Increased fiscal pressure from entitlement spending
Countries that have faced these trends earlier—like Japan and parts of Europe—have struggled with persistent low inflation despite aggressive policy efforts. We’re now following a similar path, whether we acknowledge it or not.
What the Bond Market Is Really Saying
Bond markets are often called the smartest in the world, and for good reason. When inflation fears peaked a few years ago, yields jumped accordingly. But as growth moderated and structural constraints reasserted themselves, yields retreated.
Long-term inflation expectations remain anchored around modest levels. Breakeven rates—the difference between nominal and inflation-protected bonds—hover near targets that suggest no imminent surge. If markets truly believed in runaway inflation, we’d see much higher long-dated yields.
Instead, the bond market seems to be pricing in the very forces we’ve been discussing: heavy debt loads capping growth potential, demographics weighing on demand, and deficits limiting policy flexibility. It’s a sobering but realistic assessment.
The market isn’t stupid—it reflects deeper realities that short-term noise often obscures.
Looking Ahead: More of the Same?
So where does this leave us heading into 2026 and beyond? In my opinion, the structural backdrop suggests inflation will stay volatile in the near term but trend lower over longer periods. Temporary shocks—supply disruptions, policy changes—can always push prices up temporarily, but sustaining those gains becomes increasingly difficult.
Long-term interest rates will likely remain constrained by the economy’s dependence on debt. Higher yields sound appealing to bond bears, but the system simply can’t handle them without significant pain. Growth will probably continue to disappoint relative to historical norms as fiscal drag persists.
Central banks may find themselves easing again sooner than many expect—not because inflation is too high, but because growth is too low. Rate cuts and balance sheet expansion could return to the toolkit, even if policymakers are reluctant to admit it.
Does this mean inflation concerns are dead forever? Of course not. Stronger growth would actually be welcome if it brought broader prosperity and some healthy price pressures. But achieving that in a highly leveraged, aging economy requires fundamental changes that aren’t on the immediate horizon.
The lesson from the past few years seems clear: temporary shocks can create inflation spikes, but structural forces determine the longer trend. Until something meaningfully alters debt dynamics, deficit trajectories, or demographic patterns, betting on subdued inflation and contained yields looks like the safer play.
It’s a complex picture, no doubt. But understanding these underlying weights helps make sense of why so many confident predictions missed the mark. Markets move in cycles, but some constraints feel more permanent than others. Keeping that in mind might just save a lot of headaches down the road.
What do you think—have we entered a new era of structurally low inflation, or are bigger pressures still building beneath the surface? The debate continues, but the data so far points in one clear direction.
