Deutsche Bank Survey: 80% of investors anticipate rising inflation, posing a threat to market stability

The COVID-19 pandemic has been ongoing for over a year now. Looking back to April of last year, governments around the world implemented economic lockdowns due to the outbreak, causing significant damage to the global markets. The rapid decline in consumer behavior led investors to anticipate an impending "deflationary" phase in the economy. However, one year later, it seems that investors' perspectives have fundamentally shifted. According to a recent survey by Deutsche Bank, the majority of investors now believe that the likelihood of inflation is much greater than that of deflation.

Last March, governments around the world implemented lockdowns to curb the outbreak of the pandemic, which resulted in the halt of economic activities both domestically and internationally. The economic standstill led to a drastic decrease in consumer behavior. The sharp decline in demand also caused a rapid decrease in the inflation index. At that time, governments were concerned not about inflation, but rather about the risk of deflation due to consumers refraining from spending, which could potentially lead to a severe economic depression.

Following this, central banks led by the Federal Reserve (Fed) of the United States implemented relief measures by printing trillions of new banknotes to navigate through this rare economic crisis.

One year later, the global economy did not swiftly reopen and rebound as optimistically anticipated, which seemed to shift the mindset of investors.

According to a report by CoinDesk, Deutsche Bank, a multinational bank, conducted a survey among over 700 global investors. The survey revealed that with the emergence of vaccines and economists predicting economic recovery, more than 81% of respondents believe that the likelihood of inflation occurring in the next five years will far exceed that of deflation.

Furthermore, 43% of investors expressed that inflation will surpass market expectations and even exceed the actual rise in bond yields, posing the greatest risk to market stability.

Most respondents also anticipate that the average inflation rate in the United States may surpass the Fed's long-term target of 2%, but will not exceed 3%. Additionally, around 61% of respondents believe that even if the Fed begins to reduce its monthly bond purchases by $120 billion this year, it will not pose a risk of market turmoil.

Only about 21% of individuals think that a taper tantrum may occur this year, while the vast majority hold opposing views, with 18% remaining undecided.

It is worth mentioning that the Fed had previously tapered its bond purchases in 2013.

Back then, as investors noticed the gradual easing of the Quantitative Easing (QE) policy by the Fed, it led to a significant surge in U.S. bond yields, resulting in the so-called "taper tantrum" and gradually impacting global markets.

The Fed will convene the FOMC meeting this week, and although it has publicly stated its intent to maintain the current policies, including low-interest rates and monthly bond purchases of $120 billion, the actual outcome remains to be seen after the meeting concludes.

For investors, the timing of the Fed's tapering of bond purchases is crucial as it will reflect whether the Fed is considering raising interest rates. Currently, the Wall Street consensus seems to expect the Fed to signal tapering in June, and interest rate hikes are not anticipated until the end of 2022 or early 2023.