Hedge funds are betting that inflation will pick up as central banks and governments world-wide print and spend vast amounts of money to support jobs and businesses hit by the coronavirus pandemic.
That bet goes against the weight of recent history.
Much of the developed world has grown accustomed to lower inflation since the early 1980s, and muted levels over the past decade.Plenty of investors have worried about inflation leaping since central banks began flooding markets with easy money following the 2008-09 financial crisis. They have been proven wrong. But if this year’s wave of stimulus measures—more aggressive and sweeping in scope—precipitate a sharp increase in the price of goods, financial markets may well be turned inside out.
Persistently high inflation can erode profits for companies that struggle to pass on price increases to customers, and leave consumers with less purchasing power if wages don’t keep pace. That could prove a mixed bag for stocks, and horrific for bonds, which would lose value given their currently low payouts.Inflation is unpredictable, and plays out in unpredictable ways.
The average inflation for the next decade in the U.S., as implied by the gap between yields on the 10-year inflation-linked and 10-year Treasury notes, was 1.19% Friday. In the euro area, the same measure was 0.5%, using a 10-year inflation-linked German bund, according to data from Refinitiv. Inflation expectations in the U.S. swap market, where people hedge their exposure to price changes, was 1.3%. It was 0.7% in the euro area by the same measure.
The gold market suggests something different: Prices began surging in mid-March, when the Federal Reserve launched a string of programs to boost markets and support the economy. The metal is viewed both as a haven asset and what investors call a real asset, something physical that is judged to have intrinsic value in any economy.