Global Markets Shift From "Anti Deflation" To "Anti Inflation"

China wants to fight it, and the United States wants to make it.

"Institutional investors are very concerned about inflation," said Keith Wade, chief economist of Schroders, a British fund management company, Schroder. (Keith)

China's latest inflation figures show that consumer prices rose 5.1% in November, much higher than expected.

Food prices are the biggest incentive for inflation in November, and some economists have begun to worry about the rise in non food prices.

But the stock market is optimistic at the moment.

Asian and European stock markets rose on Monday, mainly due to news that although inflation is rising, China has little chance of raising interest rates in the short term.

In the US, investors' expectations have hardly changed.

The US Federal Reserve (Fed) is determined to push.

The US Federal Reserve announced the second round of quantitative easing (QE2) in November, which will buy US $600 billion of long-term US Treasury bonds, inject capital into the financial system and revive the economy.

Since then, yields on US Treasury bonds have probably risen sharply.

But the rise in US Treasury yields is almost the same as the actual rate of return that has been adjusted for inflation.

Morgan chase Asset Management Co (JPMorgan Asset Management) said that during this period, the so-called "profit and loss balance" inflation rate remained at the current level of 2.19%.

Some analysts believe that this indicates that the market is slowly returning to normal and gradually ignores the "tail risk" of deflation which has been plaguing the market for most of the year.

"Investors are still hedging against inflation, but people who are concerned about deflation have decreased," said Dean Curnutt, chief executive officer of Macro Risk Advisors.

"The moderation in the market is stronger now than before."

Other analysts, however, worry that the financial market may be overlooked at a sudden fall.

"You have to think about what you want," said Patrick Rudden, head of AllianceBernstein's equity strategy in London. Patrick said.

His research shows that severe inflation is bad for stocks and bonds.

"If inflation rises to 3%, 4% or 5%, that's a problem for the stock market."

A more pressing concern is the rise.

"America's easing of money is putting pressure on emerging markets," said Nigel Randall, senior strategist at the RBC Capital Markets emerging market, Nigel Rendell.

"This creates more global liquidity, and they may be tempted to enter emerging markets.

In some countries, the stock market and property market may overheat.

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Indeed, data from EPFR Global, a data provider, shows that $89 billion has been inflows into emerging market equity funds this year, while the funds coming from developed countries' stock funds are US $79 billion.

This not only causes problems in Asia.

Brazil has adopted capital controls. The Turkey government suggested last weekend that it might follow China's lead to raise the deposit reserve ratio of commercial banks in order to cool the economy.

Turkey, unlike some heavily indebted economies in the eurozone, has survived the financial crisis relatively well.

However, the threat of rising price out of control - inflation rate has risen to 7.3% - is a matter of great concern.

It is reported that Ankara is considering lowering interest rates to curb capital flows.

The positive reaction of the stock market to China's inflation figures on Monday aroused some economists' concerns.

Wade said: "as China's inflation rate continues to rise, the market may be somewhat conceited that it will have some idea of the actions China will have to take."

To prevent price rises, the strategist put forward some investment suggestions, including buying gold and other commodities.

Gold is a traditional hedge against inflation, which hit a nominal high last week.

Luton said investors should focus on commodity futures instead of pure commodities to make use of the "spot premium" (backwardation) on those markets.

Another popular investment tool is inflation linked bonds.

The US Treasury issued the $10 billion negative yield bond for the first time two months ago, indicating that demand for such bonds is very strong.

But the biggest question that remains unanswered is whether inflation will actually appear in the United States. There is little evidence that consumers and businesses are willing to recover their spending.

In fact, some people are wondering whether the sovereign debt crisis in Europe will bring new downward pressure on prices.

"We think deflation pressure will rise again," Konate said.

"The potential deflation caused by the sovereign debt problem in the euro area is enormous."

Ben Bernanke, the chairman of the Federal Reserve, firmly stated that deflation should never be allowed to happen.

Deepa Majmudar, global portfolio manager of fixed income division at JP Morgan chase, said: "inflation concerns have increased. This is due to the implementation of QE2 in the United States, and the commitment of the Federal Reserve to maintain low interest rates for a long period of time", said Majmudar.

It is forgivable that investors are nervously concerned about the possibility of governments accumulating huge debts and rising prices.

As Wade said, "those who are worried that the government will reduce the size of debt through inflation may now be more worried."