Inflation, US debt & AI: key risks for NZ investors

Last week, a room full of New Zealand investors gathered at Moomoo's Priority Investor Workshop in Auckland, where they were told that the biggest threat to their portfolios in 2026 is not a technology correction or a geopolitical flare-up; it is an inflation spiral that forces the US Federal Reserve to raise interest rates while the American government is carrying more than US$38 trillion in debt.

The artificial intelligence narrative has dominated global markets for the better part of two years. It has driven extraordinary returns in technology stocks and convinced millions of investors that we are living through a once-in-a-generation transformation.

That assessment is probably correct. AI will reshape industries, create new categories of wealth, and fundamentally change the way we work and invest. But there is an uncomfortable truth that very few commentators are willing to say out loud: the entire AI growth story is sitting on top of an increasingly fragile fiscal foundation, and it is showing cracks.

The current trajectory of US fiscal policy is, to put it plainly, incredibly dangerous. The Congressional Budget Office confirmed this month that America's national debt is projected to reach US$64 trillion within a decade. Interest payments alone will hit roughly US$2 trillion a year by 2036, meaning approximately five per cent of the entire American economy will be spent purely on servicing debt. The federal deficit is expected to grow from US$1.9 trillion this year to US$3.1 trillion by 2036. Debt held by the public is on track to reach 120 per cent of GDP, exceeding the record set in 1946. These are not theoretical projections. This is the reality investors are navigating right now.

A debt burden of this scale limits the ability of the Federal Reserve to cut interest rates, even when the economy needs stimulus. The Fed held rates steady at 3.5 to 3.75 per cent in January, pausing after three consecutive cuts last year. If inflation reignites, and consumer expectations are already sitting at 3.1 per cent, the Fed may be forced to raise rates again while the government is already drowning in repayments.

The danger of an unchecked inflation spiral is that it destroys economies. Higher prices reduce productivity, workers demand higher wages, businesses fail, and people lose their jobs. That is why every central bank in the world has inflation at the heart of its mandate.

In fact, New Zealand right now is proof that this is not just an American problem. Moomoo ANZ market strategy consultant Greg Boland, who joined the panel discussion at the Auckland workshop, spoke bluntly about the local picture: "New Zealand's last inflation reading came in at 3.1 per cent when the market was expecting 2.7. That kind of surprise changes the calculus for the Reserve Bank and for every investor thinking about where to put their money this year."

He is right. The Q4 2025 CPI figure pushed inflation back above the Reserve Bank's one to three per cent target range for the first time in months, and business managers' inflation expectations have risen to their highest level since early 2024.

The Reserve Bank announces its OCR decision this Wednesday, and while the rate is widely expected to hold at 2.25 per cent, the tone from new Governor Anna Breman will matter enormously. Investors on both sides of the Pacific should be listening carefully.

Now layer in the political dimension. The key event risk for global markets this year is the US midterm elections. Control of both houses of Congress is up for grabs, and a president without support from both houses will struggle to be effective. That has enormous implications for AI investment, government spending, and market direction. Recent polling shows Democrats leading Republicans by the widest margin since 2017, mirroring the pattern from Trump's first term when Democrats won 40 House seats in the 2018 midterms.

A divided Congress could see billions of dollars in government AI spending and technology incentives curtailed or redirected. The technology giants that have driven market returns are already facing scrutiny over massive capital expenditure increases, and software stocks have begun to wobble. AI is not going away, but the easy money phase may well be over.

So what should New Zealand investors do with all of this?

• First, do not panic. Volatility is not the enemy. For well-prepared investors, it creates opportunity. But preparation requires understanding the risks, not ignoring them.

• Second, pay close attention to inflation data on both sides of the Pacific. The numbers coming out of New Zealand and the United States over the next few months will determine the interest rate path, which determines the cost of capital, which determines the value of every asset you own.

• Third, watch the US midterms. Political risk is chronically underpriced by markets, and this cycle has the potential to reshape the investment landscape for years to come.

The investors who gathered at our Auckland workshop last week left with a clear message: 2026 will reward those who stay informed, stay disciplined, and refuse to confuse optimism with complacency. The opportunities in AI, in global markets, and in New Zealand's own economic trajectory are real. But so are the risks. Ignoring either would be a mistake.

Michael McCarthy is CEO and Market Strategist at Moomoo ANZ. Moomoo is a global investment platform with over 27 million users, recently launched in New Zealand, providing Kiwi investors with access to US, Hong Kong, and Australian markets.