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How to invest as inflation fears grow

There is no clear outlook on inflation and interest rates so a diversified portfolio is sensible
How to invest as inflation fears grow
  • Bond market yields imply rising inflation expectations
  • Wealth managers don't expect that inflation will trigger a policy response this year

Over the past year, enormous stimulus packages have been launched to prop up economies and interest rates have been cut to record lows – in some cases negative levels. The US stimulus has been the most dramatic, with the broad money supply annual increase last year going from roughly 5 per cent to 25 per cent. This could lead to a rise in inflation as activity picks up.

Bond investors appear to be starting to anticipate inflation, with a sell off in global bond markets in recent weeks. Inflation is bad news for bonds, because it erodes the real value of the interest they pay, and it makes a rise in central bank rates more likely. The bond sell off has been, again, most pronounced in the US, with the election of Joe Biden and increasing likelihood of his $1.9 trillion (£1.36 trillion) pandemic aid package being passed. 

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