A Fractured World Order: How Geopolitics Shapes Inflation

For 2026, and heading into 2027, global uncertainty, international conflict, policy shifts and rising power centers will continue to influence the trajectory of geopolitical and economic conditions. Based on The Hartford’s Risk Monitor survey, inflation remains one of the most pressing concerns for businesses as these dynamics continue to shape the economic outlook. The inflation gauge most commonly referenced is the Consumer Price Index (CPI), a headline indicator that measures the year‑over‑year rate of change in prices paid by consumers. Beneath the headline figure, CPI is composed of four major subcomponents — goods, services, food and energy. Each provides insight into where and how inflationary pressures emerge, by item, thus making it important to monitor these sub gauges to understand the broader contours of overall inflation. 

 

Inflation surged to a multi-decade high in recent years, initially driven by sharp goods inflation as supply chain disruptions collided with strong consumer demand from 2021 to 2022 due to the COVID pandemic. As supply constraints eased, inflationary pressures shifted toward services. Inflation began to moderate in the second half of 2022, eventually declining from a near-term peak of 9.1% to approximately 2.3% in early 2025. However, as we noted last year, trade policy, specifically tariffs, has the potential to reintroduce price pressures as businesses pass higher import costs through to consumers. Consistent with this view, goods inflation, which is typically the most sensitive to tariffs, began to edge higher in the second half of 2025. 

 

Beyond tariffs, geopolitics has once again emerged as an important near‑term driver of inflation. The conflict in the Middle East and resulting disruption in the Strait of Hormuz have pushed oil and other energy prices higher. These increases are now feeding through to headline inflation via the energy subcomponent of CPI. In March, headline CPI rose from 2.4% to 3.3%, largely driven by energy prices and, within that, gasoline. This development was broadly in line with expectations and underscores the degree to which energy markets remain vulnerable to geopolitical shocks, with direct implications for business costs. 

 

Looking ahead, the outlook for inflationary pressures depends on several key factors. First, the trajectory of the Middle East conflict could impact energy inflation. Disruptions to energy production or transportation can sustain upward pressure on energy prices, amplifying headline inflation. In this context, both the magnitude of energy price increases and the duration of the conflict matter. Prolonged disruption raises the likelihood that higher energy costs spill over into other areas of the economy, reinforcing broader inflationary dynamics that businesses must plan for. 

 

The second factor that could impact inflationary pressures is trade policy, particularly tariffs, which could potentially influence goods inflation. This is significant because even if geopolitical tensions were to ease, tariffs remain a structural consideration that affect goods inflation. The administration has employed two primary forms of tariffs: country‑level tariffs, which apply broadly to goods originating from specific countries, and product‑specific tariffs, which apply to designated goods regardless of origin. Following the Supreme Court’s ruling invalidating the 2025 reciprocal tariffs, the administration reinstated many country tariffs through other policy mechanisms, while most product‑specific tariffs have remained in place. As a result, the cost of certain imported goods remains elevated. We began to see modest evidence of tariff pass‑through to consumer prices in late 2025, and this trend could persist through 2026 and beyond, primarily affecting goods inflation and input costs. 

 

Lastly, the third key factor that may impact inflationary pressures is labor costs, which feed into services inflation. Wage growth has remained relatively sticky, rising at roughly 3.5% to 4.0% year‑over‑year in recent years, compared to approximately 2.0% to 2.5% a decade ago. Our analysis suggests demographics are one of the drivers. An aging U.S. population and increased retirements have slowed labor force growth, constraining labor supply even as job creation moderates. While expanded adoption of artificial intelligence may eventually dampen wage pressures in select industries, we expect wage inflation to remain above trend in the near term. 

 

Collectively, trade policy, geopolitical conflict and demographics may impact inflation to varying degrees and could present headwinds for the U.S. economy. At the same time, several structural tailwinds remain in place. Investment in artificial intelligence infrastructure continues to support non‑residential construction, particularly data centers, with potential spillovers into power generation and grid capacity. Healthcare spending also remains a durable source of growth as an aging population drives sustained demand for medical services. Finally, the U.S. consumer has thus far remained resilient, supported by low unemployment and solid wage gains, though the outlook for consumption remains sensitive to energy prices. 

 

Over the longer term, these dynamics fit squarely within a broader theme of a changing and increasingly fractured world order. The rise of new economic power centers, shifts in trade flows, a re-setting of economic ties and evolving security alliances are reshaping the global economic landscape. As geopolitical considerations increasingly influence policy choices and commercial relationships, economics will likely be impacted too. Accordingly, these macro trends have the potential to impact broader economic conditions and the overall global risk landscape.