Franklin Templeton sees stagflation risks building

Binaya Dahal

Journalist

17 June 2026

Franklin Templeton has warned that global market is drifting toward a more stagflationary environment as inflationary pressures intensify and growth diverges across major economic regions.

In its latest macro report, the $1.66 trillion US asset manager said rising costs, supply constraints and policy uncertainty were leaving central bankers with limited flexibility as they seek to contain inflation without derailing economic activity.

The report, authored by Sonal Desai, Nikhil Mohan, Angelo Formiggini and Rini Sen, noted the US economy regained momentum in early 2026, supported by AI-driven capital expenditure and stronger federal spending. But the firm argued broader conditions resembles stagflation.

“Higher oil prices, supply-chain disruption tied to the Strait of Hormuz closure, and artificial intelligence-related demand are adding to inflation pressures that already appear structurally closer to 3% than 2%,” the authors wrote.

The manager said consumer spending has remained resilient, but real incomes are under pressure with weakening discretionary demand despite a stable labour market.

“Real incomes are already under pressure as they declined for a third straight month in April and have fallen year over year; a pattern that outside of stimulus or tax distortions has usually appeared during or shortly after recessions,” it said.

“Spending composition is also deteriorating, as real goods spending has increased given gasoline prices rather than discretionary demand, durable goods spending has turned slightly negative, and real retail spending excluding energy has stalled.”

In Europe, Franklin Templeton said the economic environment since the escalation of Middle East tensions increasingly resembles a stagflationary shock, though it stressed the situation differs from the 2022 energy crisis.

“Unlike the Europe-specific gas crisis, this is a global shock, and Europe’s improved energy diversification means energy availability is no longer the prominent concern it once was,” the firm said.

“Still, the eurozone enters this shock from a weaker cyclical starting point, with softer demand, less labor-market tightness, and likely less room for second-round inflation effects. Recent data broadly fit the pattern of higher inflation and weaker growth, though hard data have held up better than surveys suggest so far.

“Headline inflation rising above 3% supports the view that the European Central Bank can no longer look through the shock.”

In Japan, the manager said stronger-than-expected first-quarter growth, driven by exports and household consumption, has supported the near-term outlook. However, supply constraints, rising prices, weaker sentiment and yen depreciation could weigh on activity in coming quarters.

“Inflation has been more muted in the headline data, largely because policy support is capping energy and education costs, but underlying price pressures remain intact and are likely to build as higher energy costs feed through,” the firm noted.