‘Divided’ investors caught in inflation confusion

Investors are worried about deflation. That might sound odd, given that the opposite fear — of rising consumer prices — has grabbed attention and fired up assets such as gold.

But the price of options linked to inflation swaps shows that investors are paying up to protect against extreme scenarios at both ends of the spectrum. The probability of price declines in the US has more than quadrupled to 7.5 per cent since the start of this year, those options show, even while the chance of annual inflation running hotter than 2.5 per cent over the next half decade has almost doubled to 8 per cent, according to analysis by NatWest Markets. 

The disparity underlines a growing polarisation among investors on one of the biggest questions facing markets. The simultaneous fears of both inflation and deflation also help to explain the breadth of a rally this summer, which has taken in classic inflation hedges like gold as well as government bonds, which benefit from stagnant or falling prices.

“The market is grappling with the risks of both deflation and high inflation,” said Theo Chapsalis, head of UK rates strategy at NatWest Markets. “I have never seen the investment community so divided.”

In the eurozone and the UK too, although the levels of inflation expected are different,…

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