On government bond markets, a modest rise in inflation and inflation expectations from their current very low levels in the US and UK will be echoed in rising yields. This is especially the case when combined with the limited incremental effects of monetary policy and the focus on increased levels of fiscal spending.
Equity investors lack a reliable guide for an environment of higher inflation. Numerous studies have looked at the impact of inflation on stock returns, examining historical stock market performance during periods of high and low inflation. Unfortunately, these studies have produced conflicting results when adjusted for factors such as geography and time period, and level of initial inflation.
In the near term, then, the best approach is perhaps to wait it out. While the recent pickup in prices, particularly in the UK, looks somewhat dramatic, increases should moderate in the coming months as drastic moves from the currency and oil price effects fade. While the balloon will have a little more air in it, investors do not need to worry yet about it sailing off across the rooftops.
Nandini Ramakrishnan is global market strategist of JP Morgan Asset Management
