US consumer prices are the highest in a decade, while the commodity and labour markets as well as business surveys suggest that supply-side inflation is not only high but is expected to increase further. Yet, there is a growing confidence among bond market investors that high inflation would be transitory. The yield curve has flattened over the past two months, suggesting a lack of concern about inflation but a concern about growth. This concern appears in equity markets too. That is, valuations are picking up for growth stocks that have better access to capital, and thus tend to perform well when the yield curve flattens, and they are falling for value stocks that have better access to capital when the yield curve steepens. Investors seem to believe that the commodity and labour market bottlenecks will ease; if that does not happen, persistent inflation will come as a surprise to them. Alternatively, if these bottlenecks do ease, insufficient economic ‘heating up’ (reflation) and/or a resurged pandemic may indeed establish sluggish growth.
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