If the DeepSeek breakthrough was what ended the US bull market in stocks, today’s inflation report may have helped it turn the corner into a bear market. From the lofty highs US stocks have reached, there could now be a long way down.

Investors, market analysts and the Federal Reserve had all been expecting inflation to fall further this year, or at least level off, enabling the Fed to make further cuts to interest rates in 2025. Instead, this month’s consumer price index ticked back up to 3%. Meanwhile, any hopes that this might just be a blip were dashed when core inflation also rose to 3.3%, suggesting further pain for shoppers lies ahead.

Bond yields, which had fallen briefly after touching new highs in January, resumed rising. Long-term interest rates have returned to close to where they stood at their recent peak, and are approaching levels last seen early this millennium. Although Donald Trump is calling for the Fed to reduce interest rates, Fed futures show that investors now expect little monetary easing for the remainder of the year.

For the President, the news could hardly have come at a worse time. If prices continue rising, it will mean that the fall in inflation from 2022 highs bottomed near the end of Joe Biden’s presidency. Trump is not responsible for this week’s bad news on inflation, but he will receive the blame nonetheless. He is, after all, the president many voters trusted to bring down prices.

Compounding this is the recent uptick in inflation expectations among American consumers after two years of decline. Given continued tightness in the US jobs market, workers expecting a rising cost of living may be in a position to bargain for better wages, which will put further upward pressure on prices. What will especially worry Trump, though, is the partisan bias of expectations. Democratic expectations of rising prices have surged since Trump took office, but among Republicans inflation expectations have plunged to zero. He is therefore certain to disappoint his supporters.

Most difficult of all, however, will be the way this development complicates his administration’s policy-making. Given the scale of the US fiscal deficit, rising interest rates will drive up debt-repayment costs, which will only deepen the budget red ink. Trump may find having to choose between tax rises or cuts to spending even deeper than what Elon Musk envisions. In such circumstances, it’s a safe bet that Treasury Secretary Scott Bessent will now be urging him to go slow on the trade war. The President’s room for maneuver may get a little more hemmed in.

After years in which the market sucked in capital from around the world, leading to a spectacular bull market, there are now signs that money may be quietly leaving the US and returning to Europe and Asia, whose markets are starting to outperform America’s. If a bear market has begun in the US, there’s no telling how low things could go. US stock multiples far exceed those of other markets, and there’s a lot of money ready to go searching for other opportunities. Were US share prices to sink very far, the reverse wealth effect could then raise risks of a recession at some point in the foreseeable future.

Rising prices, steeper mortgage rates, falling wealth and a possible recession: it’s not at all the situation Trump wanted to inherit at the start of his second term of office. As today’s report demonstrates, though, it’s the one he’ll have to confront.

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John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a Religion (Simon & Schuster, 2017).

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China is trying to catch up with America on artificial intelligence. The Wall Street Journal has reported that Zhipu AI — one of China’s six “AI tiger” LLMs — has released a new model that can rival leading US systems, including Anthropic’s Mythos, in cybersecurity tasks such as pinpointing security bugs. While this marks a milestone in China’s drive to catch up with Western AI capabilities, strong performance on a single benchmark does not mean it has taken the lead. Chinese models still lag behind their Western counterparts in broader capabilities, such as autonomous operation. Skepticism is therefore warranted before resorting to hysterical conclusions, but complacency about the geopolitical implications of China’s AI advances would be an even greater mistake.

On the infrastructure side, Chinese AI is still constrained by access to advanced chips, with American labs way ahead in computing capacity as well as investment. Analysis from earlier this year suggests that Chinese models are likely to be at least a few months behind those in the US. But they are still continuing to make progress, or that the geopolitical importance of AI will be decided only by whose LLM has ventured deeper into the technological frontier. The practical applications of AI, countries’ to capture foreign markets, and the application of AI into the real economy will matter just as much.

Here, China may hold an advantage. As with its dominance across many critical supply chains, Beijing may not need to produce the most advanced AI systems — only those that are affordable and widely deployable. In doing so, it could consolidate global influence by supplying functional, low-cost AI at scale.

Beijing seems to be pursuing exactly that path, developing an AI “open-source” strategy that offers affordable, widely available AI models for companies and individuals to use and modify as they wish. The production of the DeepSeek AI model, which matched the performance of Silicon Valley tools such as ChatGPT at a fraction of the cost for users, created goodwill among Chinese models with developers.

The four most popular models on OpenRouter, an AI hardware platform for developers, are now all Chinese. The goal for China is not only to win the frontier-model race, but to make its systems the default layer of AI adoption across industries and global markets. For most economies, the choice is increasingly between an affordable tool they can deploy now and a more robust one that may be out of reach.

And while the countries adopting Chinese models may be exposed to political pressure and cyber threats from Beijing, safer and more capable alternatives matter little if they are unaffordable. American AI companies are already under pressure to monetize products whose operating costs are rising. If Chinese open-source models become the cheap default for startups, universities, governments and businesses across the developing world, then America’s AI lead will be eroded from below.

Perhaps more concerning for America in the long run is how AI can give Chinese manufacturing even more strength, through the ongoing integration of AI as a general-purpose technology. China’s new Five-Year Plan mentioned AI more than 50 times and includes an “AI+” action plan aimed at spreading AI across the economy.

Beijing has been pioneering automation of its critical infrastructure for years, with promising recent results in increasing warplane production capacity. In that regard, China’s open-model strategy and manufacturing dominance will reinforce each other. Cheap, adaptable models accelerate deployment across the real economy while those deployments generate real-world data and use cases that can feed back into further model improvement.

The United States should not dismiss the importance of its lead in the AI race. That lead worries Beijing, not least because a more automated Chinese economy would also become more vulnerable to AI-generated cyber threats. But nor should Washington assume that China cannot catch up with American capabilities over time.

This AI competition represents part of a broader struggle over tech supply chains and geopolitical influence. Decisions over whether to adopt US or Chinese models could produce a more fragmented global reality, with different regions relying on different cloud providers, chips and security structures. The result will likely be a global economy which is divided into competing spheres, rather than one which produces a single winner.

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Miquel Vila is a political and geopolitical risk consultant focusing on industrial strategy, critical infrastructure and global supply chains.

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