Decoding U.S. Inflation: What Headline CPI vs. Median CPI Tells Us About the Economy

The U.S. Bureau of Labor Statistics published the September 2026 Consumer Price Index for All Urban Consumers (CPI) on October 14, 2026, showing that the index “increased 0.6 percent on a seasonally adjusted basis…after rising 0.4 percent in August…Over the last 12 months, the all items index increased 3.7 percent before seasonal adjustment.”

That increase is modest, yet it could lead some observers to conclude that inflation pressures are once again broadening across the economy. However, to better understand whether inflation is truly broad-based, it is helpful to examine the Median Consumer Price Index, which is calculated by the Federal Reserve of Cleveland. By comparing the 12-month headline CPI rate against the 12-month median rate, we can clearly determine whether price pressures are widening across ordinary household purchases or confined to a few outlier categories.

We accessed the St. Louis Fed FRED database to construct our graphs.

 

We show the headline CPI (solid blue lines) by cumulative price change over the preceding 12 months, landing at 3.7% in September. With respect to the Median CPI, it measures the middle (50th percentile) price change across all consumer categories. The Median CPI (green dash lines) currently stands at 2.8%. This data transformation allowed us to establish a like-for-like comparison. 

Historical Context at a Glance

Three periods stand out:

1. Jan-2021 to Mid-2022: Both Headline CPI and Median increased in tandem. This meant that inflation was pervasive and widespread across every sector of the economy, and that prompted aggressive rate hikes by the Federal Reserve.

2. Mid-2022 to Late 2024: CPI dropped rapidly, as the supply disruptions during COVID subsided; but Median CPI remained elevated, consistently running above Headline CPI. That dynamic meant that core domestic expenses took longer to cool, creating inflation “stickiness” that kept the FRB on hold.

3. Mid-2025 to Early 2026: Median CPI steadily broke lower, with both metrics converging on average around the 2% - 3% range.

Conclusion:

As shown by the latest data, Headline CPI has ticked up to 3.7%, which gives the impression that inflation is heating up again. However, the Median CPI remains anchored at 2.8%, which suggests inflation is not presently exhibiting the type of broad-based acceleration characteristic of a new inflationary cycle. The latest data does not yet support the conclusion that the economy has entered a renewed inflationary cycle. Of course, things can change rather quickly, but when it comes to an inflationary phase, we are not there right now.

Locking In Treasury Yields: Opportunity or Premature Optimism?

According to a recent Financial Times article, investors are increasingly buying US Treasuries as yields climb toward levels not seen in decades. The rationale is straightforward: many investors believe rates may not rise much further, making current yields an attractive opportunity to lock in income. With inflation expectations remaining relatively stable, real Treasury yields have risen to around 3%, a level that many portfolio managers view as compelling.

One aspect of the article that caught my attention was the graph showing the sharp rise in US real yields since 2021:

While many investors appear to interpret current yield levels as attractive, the chart itself does not clearly indicate that real yields have reached a ceiling. In fact, the trend over the past several years has been upward. If real yields continue to rise, it would suggest that nominal interest rates are increasing faster than inflation expectations. Such a development could indicate the presence of structural forces supporting higher interest rates. However, the chart itself does not identify the source of those forces.

A second observation concerns the argument that financial stress, particularly in Europe, could lead to capital flows into US Treasuries. This logic is understandable. During periods of uncertainty, investors often seek the perceived safety and liquidity of the Treasury market. Increased demand would tend to push Treasury prices higher and yields lower. However, it is also worth considering whether a future economic slowdown or sovereign debt concern could simultaneously increase government borrowing needs, adding more Treasury supply to the market. The eventual direction of yields may depend on which force proves stronger.

For that reason, the most interesting question raised by the article may not be whether current Treasury yields are attractive. Rather, it is whether investors are correctly assessing the longer-term forces influencing interest rates.

Conclusion:

If inflation moderates and risk aversion rises, today's buyers may be locking in attractive returns. If structural forces continue pushing real yields higher, however, today's yields may prove less attractive than they currently appear. On balance, I believe the risks are tilted toward higher yields. Time will ultimately determine which view is correct, but the debate itself highlights just how important the Treasury market has become to the broader investment landscape. 

What Does It Mean When Private Equity Sees Global Financial Crisis-Level Opportunities While Markets Appear Calm?

According to the Financial Times, 

"Dipan Patel, co-chief executive of UK-headquartered buyout group Permira, told the FT Private Capital Summit in London this week that deals cut after the dotcom crash and global financial crisis were ‘among the best’ ever. ‘We're right back there today,’ he said."

Patel's comments caught my attention because they suggest that private market valuations have become unusually attractive, comparable in some respects to opportunities seen after the dotcom crash and the Global Financial Crisis.

While this does not necessarily imply that another crisis is imminent, it does raise an important question: Why are experienced dealmakers finding opportunities today that remind them of periods following major market dislocations?

If private market opportunities are indeed becoming comparable in some respects to those seen after prior market dislocations, while the broader financial markets continue to function with relatively little visible stress, we should consider whether underlying economic and financial risks are greater than generally perceived. At a minimum, Patel's observations may suggest that pockets of stress are developing beneath the surface, even if a broader crisis has yet to emerge.

Why Higher Treasury Yields Do Not Necessarily Mean Economic Disaster

Dan Ivascyn, chief investment officer at Pimco, argues that a 6% yield on the 10-year US Treasury bond is a realistic possibility. He warns that such a scenario could trigger selling pressure in the bond market as leveraged investors unwind positions and other market participants seek to reduce risk. Higher yields could also place pressure on equity and credit markets. At the same time, however, he believes that further increases in yields may ultimately be constrained by investors seeking to lock in relatively attractive bond returns, particularly when compared with riskier assets. Ivascyn also highlighted sovereign debt markets outside the United States that appear attractive from a risk-reward perspective, including Australia and the United Kingdom.

In theory, higher interest rates are not necessarily bad. What matters is not only the level of rates themselves, but also the expectations surrounding them. Economies tend to struggle most when expectations become unanchored and conditions change abruptly. If markets broadly expect higher rates and those expectations develop gradually, businesses, consumers, and investors can adapt their behavior over time. Problems tend to arise when rates rise sharply or unexpectedly, creating imbalances that force participants to adjust all at once.

Think about a rush of water. The initial surge can create havoc, but over time the water settles and the disturbance gradually subsides. The same analogy applies to economic shocks. The initial disruption often triggers a rush for the exits, so to speak, as markets rapidly reprice risk and participants scramble to adjust. Eventually, however, markets establish a new equilibrium and adapt to the new reality.

My poster-child example is Turkey. Consider the following two charts showing consumer price inflation and real GDP in Turkey:

The purpose of this example is not to compare Turkey with other nations, nor to suggest that high inflation is desirable. Rather, it illustrates that economies are often capable of functioning even under extremely difficult conditions. Since 2021, Turkey has experienced annual consumer price inflation exceeding 20%, creating significant economic challenges for households and businesses. Yet economic activity continued, businesses remained open, transactions continued to occur, and the economy adapted, albeit painfully. In short, difficult economic conditions do not necessarily imply economic paralysis.

Conclusion:

The takeaway from all this is that while higher Treasury yields would almost certainly create economic and financial market disruptions, disruption is not the same thing as collapse. In my view, one major factor that can increase the probability that a disruption turns into a collapse is ineffective government intervention, but that is a story for another day. Suffice to say for now that adjustment can be painful, and some sectors may experience greater stress than others, but economies generally adapt to changing conditions over time. A 6% 10-year Treasury yield would likely present meaningful challenges for markets, businesses, and consumers, but it does not automatically mean that an economic catastrophe is inevitable.

Higher Rates, Higher Risks: The Growing Pressure on Corporate Borrowers

According to the Financial Times,

“A sharp sell-off in US government bonds is starting to reverberate across corporate America, forcing companies to overhaul their borrowing plans and even raising the spectre of defaults among the most lowly rate businesses.

Borrowing costs for companies with the lowest credit ratings hit their highest levels since May 202 this month at 17 per cent, driven by the rise in Treasury yields to multiyear highs and by investors demanding more compensation for lending to such businesses. The risk premium for groups rated triple C or lower has risen to 12 percentage points, the biggest since 2022.”

This prompted me to examine the data myself and assess whether the evidence supports the Financial Times' conclusions.

My Analysis:

When companies borrow money in the bond market, the interest rate (or “effective yield”) they must pay depends on their financial strength. I analyzed three distinct corporate tiers:

• US Corporate (Investment Grade): Consisting of solid, blue-chip corporations with strong balance sheets.
• BB High Yield: Consisting of mid-tier companies with higher debt but stable businesses.
• CCC & Lower High Yield: Consisting of higher-risk or financially strained companies with the highest borrowing costs. These were the ones that were of special focus in the Financial Times reporting.

To easily compare how fast borrowing rates have grown across these different tiers in 2026, I indexed all yields to a baseline score of 100 on January 1, 2026. The way to read this index is to think of 100 as the starting point. If the index rises to 120, it means that tier’s interest rate increased by 20% from where it started in the year. This helps us see which companies saw their borrowing costs rise fastest in percentage terms and whether all rates moved up and down at the same time.

Take a look at the graph, courtesy of the data obtained from the St. Louis FED FRED database:

What the Numbers Show:
Early 2026 (January – May): During the first five months of the year, all three credit tiers move together in a tight band between 100 and 112.

Mid-to-Late 2026 (June – October): Starting in June 2026, the lowest-rated debt (CCC & Lower) broke away and shot upward. Given the dynamics of the chart I’ve included (i.e., it is not a live chart with values that can be observed when hovering the mouse), I’m mindful that the exact values are difficult to see. However, roughly-observing:

• CCC & Lower reached ~136 by October (a +36% proportional increase in its yield rate).
• BB High Yield rose to ~128 (+28% increase).
• US Corporate (Investment Grade) rose to ~124 (+24% increase).

How 2026 Differs from 2025:

In 2025 we saw High-risk companies enjoy a relatively lower rate pressure for much of the year (which you can see that their index spent long stretches down around 88), while mid-tier BB bonds saw the biggest spike in the spring of 2025.

In 2026 that dynamic completely flipped. In the second half of 2026, consistent with what the Financial Times reported, the most vulnerable companies faced the steepest rate hikes, seeing their borrowing cost surge much faster than those of safer corporations. Why? As Treasury yields have increased, so has the baseline cost of capital for all borrowers. Lower-rated companies often experience an additional widening of credit spreads as investors demand greater compensation for default risk. As a result, CCC borrowing costs can rise much faster than those of investment-grade issuers.   

Conclusion:

Refinancing Squeeze on Vulnerable Businesses: A +36% jump in borrowing rate levels means heavily indebted, lower-tier corporates face a severe increase in annual interest expenses when rolling over or issuing new debt. The open question becomes how many of these firms will be able to obtain financing.

Growing Caution in the Market: When investors demand much higher proportional yields from CCC-rated issuers compared to solid blue-chip companies, it signals heightened market concern about credit stress, debt serviceability, and default risks among financially vulnerable firms.

Should the upward trend in yields persist, I would expect default risk to rise across the corporate sector, particularly among lower-rated issuers that depend heavily on refinancing. At the same time, Investment Grade corporations may become increasingly selective in their debt issuance, acquisition strategies, and capital allocation decisions as financing costs rise. In that environment, higher borrowing costs would act as a drag on both corporate activity and broader economic growth.

QT, Sovereign Debt, and the Risk of a New European Credit Crisis

In a recent opinion piece, Lorenzo Bini Smaghi, former member of the European Central Bank’s (ECB) Executive Board and former chair of Societe Generale, raised the same sovereign risk concern I wrote about in a previous post. Given that Bini Smaghi served on the ECB’s leadership board during the onset of the 2011-2012 sovereign debt crisis, his warning carries substantial institutional weight.

His core thesis is straightforward: the ECB should stop shrinking its balance sheet (so-called Quantitative Tightening (QT)), because that forces private markets to absorb a massive amount of public debt at a moment when global bond yields are already volatile and trending upward. He also mentioned the risk of the classic “bank-sovereign doom loop,” where withdrawing central bank reserves from the banking system increases banks’ refinancing costs and inadvertently encourages them to hoard domestic government bonds.

Let me explain the “bank-sovereign doom loop,” because I also think it is an important risk to be mindful of, yet it is not discussed often enough. While both central bank reserves and government bonds count as High-Quality Liquid Assets (HQLA), reserves carry zero duration risk, whereas government bonds carry duration and spread risk. As QT drains cash reserves, some banks may increasingly rely on sovereign bonds to satisfy a larger share of their regulatory liquidity requirements (like the LCR). In a rising rate environment (or when sovereign spreads widen), the market value of those government bonds declines. This depreciation reduces the collateral value of those assets (requiring larger volumes and facing increased haircuts in funding markets), forces higher refinancing costs, and creates mark-to-market losses that directly impact bank capital. You now have a regulatory liquidity tool being turned into a catalyst for balance sheet and solvency strain (the “doom loop”).    

An Ominous Shift: When the Core Countries Look Like the Periphery:

What makes this warning particularly alarming is how closely the current market dynamics echo the early phases of the 2011-2012 Eurozone sovereign debt crisis, but with one critical difference. During the 2011 crisis, bond market stress and widening spreads were primarily concentrated in peripheral economies (unceremoniously the poster children referred to as the “PIIGS”: Portugal, Ireland, Italy, Greece, and Spain). Today, however, market pressures and spread widening are being observed in core EU nations, most notably France.

When sovereign debt risk shifts from smaller peripheral economies to systemic core countries, the nature of the threat changes entirely because the latter carry larger debt loads. In addition, EU commercial banks hold significant cross-border concentrations of core EU sovereign debt. Valuation strains in these assets could place pressure on bank capital and liquidity ratios across the entire continent.

Conclusion:

Should a renewed sovereign debt and banking feedback loop in the EU manifest, the second-order effects are likely to spill over into global financial markets. We could see:

• Global Liquidity Shocks: Rapid spread widening in Europe forces global institutional investors and asset managers to reallocate capital, unwind basis trades, and reduce risk across international fixed income markets.
• Spillover to the US and Global Yield Curves: EU bond volatility increases global term premiums, driving up borrowing costs worldwide and complicating monetary policy for other major central banks, including the Federal Reserve.
• Cross-Border Banking Contagion: International banks interconnected with EU counterparties face sudden counterparty and collateral revaluation risks.     

The precise transmission mechanism is less important. What is important is to account and plan for this sovereign debt risk.

Making Sense of Rising Sovereign Bond Yields: Separating Global Conditions from Country Risk

In a recent Financial Times article, the author wrote:

“Sovereign bond yields have been rising all year, and in the past few weeks the pace has accelerated across most developed markets. But there is not a clear consensus about what’s driving the sell-off. Looking at the most cited factors — inflation and indebtedness — across various countries reveals a mixed picture.”

The article also included these graphics:

 

The article struggles to explain why this sell-off is occurring simultaneously across different countries because its analytical framework is incomplete. To make sense of what is really happening, we can look through the lens of a classic financial tool: the 5 Cs of Credit Analysis.

The 5 Cs of Credit Analysis: From Bank Loans to Sovereign Nations

Lenders have traditionally used the “5 Cs” to evaluate whether a borrower is creditworthy. When applied to national governments (sovereigns), these five principles translate into key economic realities. Let’s take a look at each.

1. Character (Willingness to pay & Political Stability): Does the government have the political will, institutional stability, and governance to honor its debts?

2. Capacity (Economic & Fiscal Strength): Does the country generate enough economic growth and tax revenue to comfortably manage its debt load?

3. Capital (Fiscal Buffers): Does the government have ‘rainy-day’ reserves, such as foreign currency holdings or national sovereign wealth funds?

4. Collateral (Legal & Resource Backing): Collateral has limited applicability for sovereign borrowers because most sovereign debt is unsecured and governments cannot be liquidated in the same manner as private borrowers.

5. Conditions (The Global Macroeconomic & Geopolitical Field): What are the broader global trends, such as worldwide interest rates, commodity prices, and geopolitical tensions, affecting everyone?

My FT Critique:

The article tries to draw a connection between a single country’s debt ratio or inflation reading and its bond yield. In doing so, they run into contradictions. The reason is simple: they are looking for a simple correlation where the relationship is far more complex.  

Every country operates within two distinct layers of risk:

·     The Common “Playing Field” (Systemic Risk = Conditions): In my view, the primary driver behind the broad worldwide rise in bond yields is the global environment; that is, the fifth C, Conditions. When the global macroeconomic or geopolitical uncertainty increases, it acts like a rising tide. All sovereign bond markets feel the pressure simultaneously, regardless of their individual fiscal health.

·    Country-Specific Stories (Idiosyncratic Risk = Cs 1 through 4): While global “Conditions” shift the entire baseline upward, each nation’s domestic circumstances determine how its bonds perform relative to the rest of the world. I won’t go into detail for each country mentioned in the FT article, but let me mention two of them. In the US, bond yields climbed not because investors feared default, but because investors still perceive room for economic growth ('Capacity') and continue to view consumer demand as relatively strong. In France, bond yields increased near crisis levels due to political instability and election uncertainty (‘Character’), raising doubts about the government’s willingness and ability to control future deficits.

Conclusion:

We cannot judge a country’s bond market by looking at one or two numbers in isolation, as the FT article attempts to do. A broad-based sell-off in government bonds is primarily driven by global Conditions, i.e., the systemic forces that impact all nations at once. Meanwhile, a country’s Character, Capacity, and Capital dictate the specific risk premium and domestic story on top of that global baseline. By separating the global playing field from individual country fundamentals, we can gain a clear, coherent framework to understand what is truly moving sovereign bond markets.