A rare shift in the global inflation map is putting emerging markets back in the spotlight. For the first time in more than a decade, price growth across a group of large developing economies has slipped below the rate seen in many advanced countries. That flip is giving central banks from Brazil to Indonesia more freedom to talk about rate cuts, even as the Federal Reserve and European Central Bank remain cautious.

The change is the result of two parallel stories. Many emerging markets front-loaded aggressive tightening cycles after the pandemic, hiking earlier and harder to keep inflation expectations in check. At the same time, several rich economies have struggled to fully tame price pressures linked to wages, services and fiscal deficits. The result is a world in which EM inflation looks surprisingly well behaved, while core inflation in the U.S. and euro area is still too high for comfort.

Local bonds back in favour

One immediate winner has been local-currency government debt. Benchmark indices tracking emerging-market bonds have outperformed many developed-market peers this year, helped by falling inflation prints and the prospect of lower policy rates in 2026. Portfolio managers who had shunned EM duration during the 2022–2023 tightening wave are now returning, drawn by the combination of higher starting yields and improving real rates.

For foreign-exchange markets, the picture is more nuanced. Currencies with credible central banks and improving inflation trajectories — from the Mexican peso to the Indonesian rupiah and Brazilian real — have attracted fresh carry flows. But the rally has not been universal: countries with weaker fiscal positions or messy politics are seeing only limited benefit, and remain vulnerable to bouts of risk aversion if U.S. yields back up again.

Not a free lunch for policymakers

For emerging-market officials, the new environment offers opportunities but also fresh trade-offs. Cutting too early risks reigniting inflation or undermining hard-won credibility. Moving too slowly, however, could choke off growth just as global manufacturing and trade show signs of stabilising. Several central banks have signalled that any easing cycle will be gradual and data-dependent, with room to pause if commodity prices spike or capital outflows pick up.

Another risk is complacency among investors. With carry trades in both FX and local bonds performing well, there is a temptation to extrapolate current conditions into 2026. Yet a renewed rise in U.S. real yields, a sharper slowdown in China or a geopolitical shock could quickly flip sentiment, reminding markets that emerging assets still sit higher on the global risk ladder.

For now, though, the inflation flip is a rare piece of good news for policymakers outside the rich world. After years of being on the wrong side of global price shocks, a growing number of emerging economies suddenly find themselves with something they have not enjoyed for a long time: room to breathe.