The Covid-19 pandemic and the US’s hard-handed approach towards China, which is unlikely to change even during Biden’s administration, had a devastating impact not only on global demand but supply chains. Several developed market companies are being forced to turn inward for reliable but sometimes costly alternatives for their inputs, which is fanning cost pressures.
That coupled with expectations of a flood of more fiscal stimulus and easy monetary policy have investors worried about inflation as shown on our chart of the week below. Investors are currently pricing US inflation to overshoot the 2% target set out by the US Fed.
This outlook has serious implications on markets. If inflation expectations are de-anchored, the Fed may be forced to tighten its monetary policy earlier than it intends which will directly impact bonds and other fixed income securities. Equities will be favoured in an inflationary environment.
Source: Federal Reserve Bank of St. Louis