Published on Sep 11, 2026 • Updated on Sep 14, 2026
This article was written by Adem Tumerkan
Content Editor, Dunham | 2025 ThinkAdvisor Luminary Award Winner | 2026 Wealthies Finalist — Thought Leader of the Year | Macroeconomics, markets, geopolitics & global trends
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Inflation has stayed above the Fed's 2% target for 65 straight months as markets now are pricing in a possible rate hike next week. At the same time, Japan's wages just grew at their fastest pace since 1997, raising the risk of a self-reinforcing inflation spiral. Meanwhile, a single data revision more than doubled China's known lithium stockpile, sending prices down over 14% in three days.
Inflation has now run above the Fed's 2% target for 65 straight months, and markets are pricing in high odds1 that the Fed hikes rates next week.
A hike from here is supposed to make credit more expensive, slow spending, and cool prices. That's the whole “transmission mechanism” central banks rely on. But rates have already been sitting above - or close to - the inflation rate for months, which in theory should already be doing some of that cooling, and inflation hasn't gotten down to the 2% target in over five years of trying. If a policy rate near or above the inflation rate isn't working, the honest question isn't whether the Fed hikes next week. It's whether the tool still works at all.
Inflation keeps running hot and the market is pricing in that the Fed will hike rates.
But rate hikes only bite if the economy needs to borrow to spend.
Raise the cost of a car loan, a mortgage, or a business credit line, and people pull back. That's the whole point.
So, what happens when a growing share doesn't?
Let’s look at what's actually driving growth right now.
None of that really slows down when the Fed hikes (as we’ve seen since 2022).
And when the thing doing most of the driving doesn't respond to the brake, the brake stops being the tool that controls the car.
Because of this, inflation has remained uncomfortably sticky.
Core PCE crossed 2% in March 2021 and never came back down - the longest stretch since the Fed adopted the explicit target in 2012.
We saw a version of this in 2022-23, when the Fed hiked over 500 basis points and growth barely flinched, because too much of the economy had already locked in cheap, fixed-rate debt and didn't feel it. The same situation is playing out again, but for different reasons.
But there’s one thing to keep in mind.
Both supply and demand are looking hot.
August's producer inflation (supply side) came in at 5.4% year-over-year - with over three-quarters of it tracing to energy, with diesel diesel4 up over 20% in a month - meaning higher energy costs continue filtering through to everyday life.
Meanwhile, on the demand side, headline CPI (which includes food and energy) held at 3.4% in August, still far above the Fed's 2% target. And core CPI (excluding food and energy) also ran hotter than expected at 0.3% for the month, driven in part by a record 5.9% jump in wireless telephone service prices - its largest single-month increase ever recorded.
On the flip side, the trend of annual inflation's been steadily decelerating for the last few years. But remember, YoY builds on last year's inflation, so it starts adding up quickly as time goes on. Thus, even with that longer decline, the recent months have stayed stubbornly sticky - and that stickiness is what's compounding the longer this drags on.
The point is - 65 months above target means this was never getting solved by one more quarter-point move (which is marginal at best).
Why? Because hiking into an economy where a big chunk of spending ignores credit costs, where an oil shock is pushing costs up anyway, and where the government keeps spending aggressively isn't tightening
It's more of a brake pedal barely connected to the wheel.
Japan's nominal wages rose5 4.7% in July, the fastest pace in nearly three decades, marking a sixth straight month above 3% growth, while real wages gained 2.4%, the largest increase in about five years, and base pay climbed 4.1%.
Sustained wage acceleration at this pace is exactly what a central bank watches for before deciding an inflationary wage-price spiral has taken hold, and it's why markets are largely pricing in a BOJ rate hike this month, with more potentially following in October and December. After three decades where nothing could get inflation to stick, the fear now is whether Japan opened Pandora's box.
For thirty-odd years, Japan couldn't get the inflation spark to light.
The Bank of Japan tried everything - zero rates, negative rates, unlimited bond buying, yield curve control, etc.
Every policy choice was an attempt at coaxing prices into a gentle simmer around 2% to get people and businesses spending. But nothing worked, and an entire generation of workers grew up assuming their paycheck would never really move, prices wouldn’t rise, and businesses would just hoard cash.
Well, they may have overdone it. . .
It’s like a match in a dry forest. A single spark doesn't spread on its own. It spreads when the fire starts generating its own heat, drying out the trees ahead of the flame front before they've even caught, and keeps going until the flames and forest are feeding on themselves faster than anyone can contain it.
Here's how the tinder got dry, and how the fire started making its own weather.
But there’s one saving grace preventing inflation from really spiking. . .
Household spending fell for an eighth straight month in July, and private consumption flatlined in the second-quarter GDP data. Meaning - wages are rising fast, but households aren’t spending their higher incomes.
The Japanese may be anxious over inflation, so they’re deciding to save more of their new wages now. But that’s something to keep an eye on.
Because if spending starts surging, that could be the ember that burns the whole area down.
Figure 2: Bloomberg (September 2026)
China's lithium carbonate inventory data jumped7 from 78,800 tons to 175,000 tons after a methodology change widened the sampling pool, and lithium carbonate futures in China fell more than 14% over the following three trading days.
The entire 2026 lithium rally was built on the expectations of tight supply, surging EV and battery demand, and a market pulling out of surplus into deficit. But that idea just took a direct hit because the market discovered it had been underestimating how much lithium was actually sitting in warehouses the whole time. Thus, if you're a miner who greenlit new production on the deficit thesis, or a buyer who locked in supply contracts assuming scarcity, the ground just moved from a data revision.
Here's a question worth mulling over - what happens to prices when the thing everyone thought they were measuring turns out to have been measured wrong the whole time?
That’s the situation lithium is dealing with.
The problem is that in China (where lithium is priced because China is the global leader in lithium refining and battery manufacturing) isn't counted the way you'd count cash in a vault.
It's essentially estimated using samples, market communications, and internal models - trying to guess what's sitting in smelters, cathode plants, and battery-cell factories that don't really publish their own numbers.
And for most of 2026, that estimate said lithium markets were tight as demand outpaced supply – which pushed prices up.
Then – late last week - the updated methodology via SMM Information and tech (which expanded its sample and split the inventory into four tracked categories instead of three showed there was more than double the lithium anyone thought was lying around.
But there are a few things that are worth separating out here, because they're not the same problem:
A mine takes years and billions to build, priced off exactly the kind of number that just got revised by 100,000 tons in a single afternoon.
And until this market grows up and better data collection happens (lithium is still a relatively new market), don't be shocked when the ground moves again.
Just try not to be the one standing on a mine when it does.
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