Is higher inflation here to stay?

After COVID-era inflation peaked at 9% in the U.S., many investors expected a swift return to normalcy. Yet more than three years later, inflation remains stubbornly high, at around 3% – well above the Federal Reserve’s 2% target.

While policymakers may still view higher inflation as “transitory,” Morgan Stanley’s Global Investment Committee is contemplating whether the economy is, in fact, entering a new era of higher-for-longer price pressures – and what that could mean for investor portfolios. 

While factors like tariffs and the timing of near-term Fed policy decisions will likely play a role in driving prices in the coming months, we also see deeper, structural forces at play that suggest inflation may remain elevated for the foreseeable future.

The U.S. has long relied on immigration to fill jobs, but recent changes in immigration policy are starting to show their effects. One projection for 2025 suggests the U.S. could see more people leaving the country than entering it for the first time in more than 60 years.¹ This poses a major constraint for industries like construction, agriculture and health care, where immigrants make up as much as 30% of the workforce.

At the same time, the U.S. population is aging rapidly, and excluding the COVID lockdown period, labor force participation has drifted to its lowest level since the 1970s.

These trends suggest that sectoral labor market disruptions – and the wage pressures they create – are not going away anytime soon. This could contribute to sustained inflation, as businesses face higher labor costs, which they may pass on to consumers in the form of higher prices.

America’s housing market is chronically undersupplied, with a shortage of nearly 5 million units.^2,3 Restrictive zoning, a lack of skilled labor and higher construction costs have all contributed to the shortage.

But perhaps the most powerful dynamic is the mortgage “lock-in effect”: Millions of homeowners took out mortgages with historically low interest rates over the past decade, and many even refinanced into mortgages below 3% during the pandemic. With rates now closer to 6%-7%, they are understandably reluctant to sell. The result? Far fewer homes on the market, higher prices and sticky shelter inflation, even as broader price pressures cool elsewhere.

The nation’s electricity grid was built for a different era, yet energy demand is exploding, driven by AI, cryptocurrency, electric vehicles, data centers and manufacturing reshoring. Data centers, alone, now consume nearly 5% of U.S. electricity and could see their energy needs more than double by 2030, according to International Energy Agency projections.⁴

Meanwhile, the grid’s aging infrastructure and the long timelines required for new power plants to secure transmission capacity create bottlenecks that will likely take years to resolve. 

Together, these constraints point to sustained upward pressure on electricity prices, which could feed directly into inflation across the economy.

Adding to the challenge: With federal debt near 120% of GDP and deficits running close to 7%, the U.S. is spending roughly one of every five tax dollars just to service debt. This raises the risk of “fiscal dominance,” a situation in which the Fed’s flexibility to fight inflation is limited by the government’s need to keep borrowing and manage its interest costs.

Markets are already sensing this tension, as the U.S. dollar has weakened and “term premiums” – the extra yield investors demand for risks associated with an uncertain policy outlook – rise for long-term U.S. Treasuries. 

What does all of this mean for investors? A period of higher-for-longer inflation could mark a turning point for an investing landscape defined for the past 15 years by low inflation, low rates and the dominance of passive U.S. equity investing.

In anticipation of this type of environment, investors should consider adjusting their portfolios for the longer-term in several ways:

• Emphasize pricing power in stocks, focusing on companies that can pass on higher costs to consumers. Active stock-pickers may benefit from wider dispersion in fundamentals.
• Diversify beyond U.S. assets and the dollar, as relative value opportunities emerge in select international markets.
• Own “real assets” like infrastructure, commodities and precious metals, which can help to hedge inflation and policy-related risks.
• Be cautious in long-duration bond exposure, as rising term premiums could weigh on fixed-income valuations.
• Focus on high-quality credit, favoring investment-grade issuers and resilient business models with pricing power. Be selective in high yield.
• Prepare for higher volatility and a potential further weakening in the diversifying relationships between assets like stocks and bonds.

Listen to an audiocast based on this report.

Article Footnotes

¹ Edelberg, Wendy, Stan Veuger, and Tara Watson. “Immigration Policy and Its Macroeconomic Effects in the Second Trump Administration.” American Enterprise Institute, July 15, 2025.

² Compared to 2000

³ Patel, Elena, Aastha Rajan, and Natalie Tomeh. “Make It Count: Measuring Our Housing Supply Shortage.” Brookings Institution, November 26, 2024.

⁴ IEA. Energy and AI. Paris: IEA, 2025. https://www.iea.org/reports/energy-and-ai. License: CC BY 4.0 

CRC# 5140888  02/2026