In theory, when money supply is growing rapidly, more money is chasing a given level of economic output and thus prices rise. Broad measures of money supply are now growing at a pace unseen since the 1980s and we will not know the consequences of this for some time yet.
Although the low inflation/low yield environment appears deeply embedded, an unexpected rise in inflation is a tail risk that could undermine that status quo. If perceptions change, and central-bank policy becomes constrained as a result, it could have far-reaching implications for asset prices. Concerns about the future path of inflation are clearly growing in some markets such as the US, yet few investors appear, as yet, to be hedged against this risk.
David Hooker, Senior Portfolio Manager, Fixed Income, Insight Investment.
Doc ID: 551553