Why inflation risks are the last thing investors should worry about right now

Name: South Africans skeptical about Covid-19 vaccines as AstraZeneca rollout halted
Uploaded: 2021-02-13T01:15:10.000Z
Duration: 2 min 28 s
Description: South Africans skeptical about Covid-19 vaccines as AstraZeneca rollout halted

While fears of runaway prices should be taken seriously, the priority for economies battered by Covid-19 is still to get the pandemic under control

With the mass roll-out of vaccines proving more challenging than expected, markets should be closely watching how this will affect company profits

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People select vegetables at a supermarket in Beijing on February 10. There is little chance of China, the growth engine of the global economy, exporting inflation any time soon. Photo: AFP

Nicholas Spiro

Published: 9:15am, 13 Feb 2021Updated: 9:24am, 13 Feb 2021

All of a sudden, everyone seems to be on high alert for the return of inflation. A sharp rise in consumer prices risks sparking a disorderly sell-off in bond markets that could ricochet through riskier assets if investors fear central banks will start tightening monetary policy earlier than expected. Concerns have been gathering pace over the past several months, but have become more pronounced since the start of the year.

On Monday in the US, a key gauge of market expectations of inflation – the 10-year breakeven rate – rose just above 2.2 per cent, its highest level since August 2014. This contributed to a further increase in the yield on the 30-year Treasury bond, which exceeded the psychologically important 2 per cent mark for the first time since the Covid-19 pandemic erupted a year ago.

Even in the euro zone, whose economy is in a much worse state due to the reimposition of nationwide lockdowns to combat a resurgence of the virus, headline inflation last month jumped to 0.9 per cent, up from minus 0.3 per cent in December and the fastest monthly increase in over a decade.

Several factors are stoking inflation, including pandemic-related supply disruptions – shipping costs have soared – and a sharp China-driven recovery in commodity prices. However, the one that is receiving the most attention among policymakers and investors is the unprecedented level of monetary and fiscal support, set to be turbocharged by US President Joe Biden’s mammoth stimulus plan.

The combination of mega-stimulus packages, the mass roll-out of vaccines and a Federal Reserve that has made it clear it will allow inflation to “run hot” to help safeguard the recovery is setting off alarm bells. Larry Summers, a respected former US Treasury secretary, warned last week that Biden’s plan could trigger “inflationary pressures of a kind we have not seen in a generation”.

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South Africans skeptical about Covid-19 vaccines as AstraZeneca rollout halted

Fears about inflation should be taken seriously. A much faster rise in prices would push up bond yields further, putting stock markets under strain by making companies’ current and future earnings streams less valuable.