Inflation shock ahead

It looks like fund managers and investors could be caught looking in the wrong direction again. Most of them were surprised by the onset of the credit crunch and they could be equally surprised by the revenge of inflation.

Judging by this month’s Merrill Lynch fund manager survey (see today’s news) managers do not see inflation as a threat. Yet trillions of dollars are being injected into the global economy through cuts in interest rates and fiscal measures. It is hard to see such action failing to have an inflationary effect. What looks likely is a painful combination of inflation and deflation in the world economy.

Perhaps it is just a question of timing. Merrill Lynch may be right to say inflation will not become apparent till 2010 or 2011. But it is likely to appear and be particularly nasty shock to those who are not expecting it.