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Monetary policy tightening likely if inflation trend doesn't abate by 2022

Rising inflation is a nemesis for bond prices, but for equity, it is a blessing in disguise if it remains within a normal range.

June 17, 2021 / 10:18 AM IST

Last week, the US witnessed highest inflation print since 2008. Consumer prices for May increased 5 percent YoY in continuation of 4.2 percent in the previous month. This frothiness in inflation can be attributed to revival of pent-up demand as economies open up, coupled with supply-side constraints as the global supply chain is yet to normalise.

However, the bigger contributor to accelerating inflation is rise in global commodity prices (both food and non-food) due to abundant liquidity and lower interest rates.

However, in spite of this spike in inflation, US 10-year yield slid from 1.77 percent to 1.44 percent over last two months and similar softening was witnessed in other global market yields. Most of the yield hardening, which happened over last six months in expectation of rising inflation is gradually reversing now. This indicates that the market is expecting inflation to be transitory, in line with the central bank commentary.

Market expects that the base effect will normalise in the near term. Supply-side constraints are also expected to normalise as the world economies open and recovery sets in.