Post-pandemic rebound: why inflation is shaking the markets

At the table of the COVID 19 crisis there is a new guest: inflation.

The rise in prices is stirring the markets, with their ears pricked to hear the words of the central bankers. The alarm stems from the probability that an inflationary flare-up - nourished by a faster-than-expected recovery - could convince the ECB and the Fed to anticipate the rate hike, conditioning the consolidation of the postCOVID recovery and modifying the allocation of resources.

The rediscovery of bonds

The expansionist policy of the Central Banks, aimed at flooding the economic system with liquidity to buffer the crisis, has reduced bond yields to historic lows and convinced investors to focus on equities to obtain a greater return. If inflation alarms Central Banks, the prospect of an early squeeze could reverse course and bring eyes back to the bond market (as has already happened in recent weeks, with yields on American T-Bonds and Italian BTPs rising sharply) .

Inflation and the recovery “problem”

Among the many side effects of COVID-19, there is a price distortion. Restrictions and uncertainties about economic resilience caused consumption to collapse and deflationary pressures to emerge. The problem could exist at the moment of recovery: the recovery, if rapid, could cause prices to rise to the point of convincing Central Banks to intervene. The threshold to keep an eye on is, as always, that of inflation at 2%. Fed and ECB have set this post as a signal of a healthy price rise: if it is lower, there is a tendency to support an expansionary monetary policy; otherwise, they could tighten the cords and increase the cost of borrowing.