Inflation, long the talk of economic forecasts, is finally becoming a reality and is sending investors racing to inflation-indexed bonds, The Financial Times reports.
Higher food and energy prices have pushed up inflation rates over the last six months in both industrialized economies in the United States and Europe as well as in developing economies like Brazil and China.
Markets are pricing stocks and bonds for even further gains.
"Inflation is likely to be a theme this year. Prices are going up everywhere and this could lead to some problems in the world economy and markets," says Alan Wilde, head of fixed-income and currency at Baring Asset Management.
"Inflationary pressures have prompted demand for index-linked bonds as investors seek protection."
Emerging markets have been particularly vulnerable to inflation rates, and investors need to pick bonds that are indexed to fight rising prices over those that aren't in countries like China, Brazil, India and Indonesia as well as smaller economies such as Thailand, Malaysia, Vietnam, Venezuela and Argentina.
"We have had a very benign environment for the emerging markets for the past two years," says Brett Diment, head of emerging-market debt at Aberdeen Asset Managers.
“The increasing inflationary pressures mean that it is now more of a challenge for investors.”
China in particular has said fighting inflation will be a priority going forward, which could mean higher interest rates.
Inflation there hit a 28-month high of 5.1 percent in November, the Associated Press reports
"Stabilizing price levels will receive more prominent status," the People's Bank of China said in a report after an annual planning meeting.
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