Following a Democrat Sweep What’s Next for Inflation?

Inflation played a critical role in shaping the outcome of the midterm election, and the bond market's first question was whether a new Congress can actually do anything to address it. The answer depends on which type of inflation. On energy inflation, Congress can work to defund the Iran conflict for but it doesn’t have the power end it. Only the President has that power and the democratic sweep gave him a reason to consider a path towards resolution.

Core Inflation that the Federal Reserve cares about most, has little to do with oil and energy markets. On that front, a slow moving congress and a President willing to use his veto power may present a more challenging backdrop to help tame inflation.

A sweep, and a disinflationary first read

Democrats took both chambers on November 3rd: a 54–44 Senate majority after flipping seven seats, with two races uncalled, and an estimated 253 to 268 of the 435 House seats, as of November 5. Vice President JD Vance wrote that “the reason we lost is the war”, which tells investors where the political pressure now sits. Markets read the result as likely to ease inflation, almost entirely through lower oil prices and lower longer-term bond yields.

The signal came through oil prices and duration. While short-term yields hardly budged, the 10-year Treasury yield touched 5.36% in October 7, 2026, the highest reading since 2002. The breakeven rate (the inflation rate that bond prices imply) stayed near 2.35% around the same time. In other words, this year's rise in yields has been about real rates, not inflation expectations.

Two types of inflation

Only one of “America's two types of inflation” is about oil. Consumer prices rose 3.7% in the year as of the end of September, with gasoline doing most of the work. The average pump price is ~$4.12, about 39% above its pre-war level in February of this year. That is the inflation voters felt, and the one Congress can plausibly influence.

The second type of inflation is the one the Fed is fighting. Core Personal Consumption Expenditures (PCE) has held between 3.0% and 3.2% since March and came in at 3.1% in September 2026. While core PCE services excluding housing reached 3.6%, a two-year high. housing costs are rising at 3.2%; goods prices still carry the effect of tariffs. None of that is an energy story.

The Fed hiked rates in September and held its benchmark interest rate at 3.75–4.00% in October with two dissents for another increase. A cheaper barrel of oil pulls headline inflation down within months, but it does little for core inflation, which was already too high even before the war began.

What a Congress can and cannot do

Congress holds one fast lever on inflation: foreign policy. It can affect the energy shock but barely touches core inflation.

Nothing Congress does in the near-term is likely to be reflected in the inflation data until the second half of 2027. The one power Congress does wield is the ability to stop funding the war in Iran. Everything else nudges government spending lower. That may be mildly helpful for bringing inflation down, can be good for long-term bond prices, but it also raises the odds of a growth scare while the Fed is still raising rates.

Who can end the war, and when

The Iran war began in February without congressional authorisation. Since then the Senate has voted more than a dozen times on war-powers measures. Only one cleared both chambers, but it was non-binding and the White House ultimately ignored it. A binding resolution needs the President's signature, and overriding the President’s veto takes two-thirds of each chamber. On whether American forces fight, Congress has no instrument the President cannot refuse.

Money however is a different lever Congress can use. The administration asked Congress for an $87.6 billion emergency supplemental package for a war that has already cost at least $37.5 billion since February 2026. Currently government funding expires on December 11^th, 2026 with no money allocated to support the war. The outgoing Republican Congress still sets the agenda until January 3^rd, so Senate Democrats can only stall an extra war-funding bill with a filibuster and push for conditions. From January onwards Democrats write the bills, can omit the war, and can attach conditions to remaining funds. A presidential veto of those bills would shut the government down.

Even that lever is blunt: every opposition Congress since the Vietnam conflict that has threatened to cut off funds while troops were in the field has always backed down. Most recently the Democrats did in 2007 during the Iraq war. The realistic outcome is a spending cap, not a halt to the war.

Which leaves the President, who can end the war on his own authority and now has a reason to: he called Vance's verdict “largely true” and played down further strikes. That is why Brent crude fell nine dollars on Wednesday, November 4th. But the election makes de-escalation more likely only because the President wants it. In our view, it does not make a deal easier to reach, and it prevents none of the events that could send oil back above $118, which it did several times since the conflict began. Those decisions sit in the White House and in Tehran. The de-escalation path now has a date on it; the escalation path could arrive any day.

The datacentre backlash

The sector most impacted by the midterms is clearly AI infrastructure as 56% of voters called datacentres a major factor. A further 38 local measures restricting AI datacentres passed, and Texas, Ohio and Georgia (home to nearly half the planned buildout) now have sceptical governors. Shares of CoreWeave, an AI computing company, fell 9.9% after the election results on November 4, while the largest tech companies rallied on the view that limits on new datacentres favour whoever already owns capacity.

The obvious takeaway for inflation is that slower datacentre growth means cheaper power. The less obvious take away may matter more: AI capex has been the main source of investment growth this year, and spreading it over a longer period at the same time government spending tightens, shifts the risk from an overheating economy to a slowing one.

What history says about power shifts and inflation regimes

A midterm power shift rarely reverses an inflation regime. Across the twenty midterms since 1946, headline inflation was higher a year later in seven cases and lower in thirteen, and in four of the twenty the change was within half a point. What decided the direction, in every case, was the Fed, the oil price or a recession. The table shows the seven elections in which the President's party lost 40 seats or more, the group 2026 belongs to.

In the seven previous instances, inflation was lower a year later in four, flat in two and higher in one. The reason is not Congress: big routs happen when the economy already looks weak, which is an economy where inflation is about to fall anyway. The rout is a symptom of the conditions that lower inflation, not the cause.

Nor does 2026 resemble the disinflation cases, which had the Fed cutting rates or a recession under way. The closest match is 2006. Then as now, an unpopular war had cost the President both chambers, the Fed was at the end of a hiking cycle, and the election-day inflation print flattered the picture because oil had just fallen. The new Congress tried to force a withdrawal from Iraq, was vetoed, and funded the war anyway. Over the following eighteen months crude ran from under $60 to $147, headline CPI went from 2.0% to 5.6%, and core inflation stayed in the low 2% range. Inflation fell only when the financial system broke in 2008.

If 2006 is the analogue, in our view three things follow:

1. Congress will likely fail to end the war, however loud the hearings, and the war-funding fight will end with the money passed and conditions attached.

2. Headline inflation over the next year will be set by the price of oil, which will be dictated by what the White House and Tehran do.

3. And the disinflation that eventually arrives is more likely to come from something breaking than from policy succeeding. In 2006 it was the financial system, and today the candidates are a levered AI buildout and consumer spending rising faster than income.

The difference to watch is core inflation that is currently sticky at 3% (compared to 2% in 2006) , a Fed still raising rates into an oil shock, rather than one about to cut, raises the odds that the break comes sooner.

There are still some key differences from the 2006 environment compared to today. Core inflation remains sticky around 3% compared to being mostly in target in 2006. The Fed is still raising rates into an oil shock, while in 2006 the Fed was starting on the path of cutting rates. Combined, this raises the odds that the break will come sooner.

What it means for investors

In our view, the net effect is likely modestly disinflationary over 12 to 24 months. The inflation readings for the next two quarters will not change; the year-over-year gasoline comparisons (known as base effects) and the December Fed decision are already set.

Oil's likely central case is lower because the President wants a deal, but the price can spike on any failed negotiation or renewed strike, and Congress cannot prevent either; crude is now a two-sided event trade rather than a trend. The case against long-term Treasury bonds has lost its fiscal expansion leg, but even at current levels deficit spending is still unsustainable.

Ultimately, the election outcome lowers the odds of fiscal expansion, lowers the expected oil price without removing the risk of a spike, and does nothing about a 3% core inflation built on services, housing costs and wages. While it does not settle the direction of inflation, rates or oil, it does widen the range of outcomes across sectors, as Wednesday November 4^th’s gap in stock performance between hospital operators, defence contractors, compute suppliers and renewables made plain. Periods in which policy and geopolitics drive returns tend to reward relative value (choosing investments that look cheap compared with similar ones) and sources of return that do not depend on a single directional view, and to punish portfolios that depend on one big-picture story proving right. The midterms have handed investors a wider set of outcomes, not a clearer trend.