EUROPE - A survey of 52 European institutional investor clients of ING Investment Management suggests that unconventional policy measures have undermined the credibility of the European Central Bank (ECB), leading to concerns about higher-than-target inflation.
However, respondents do not appear overly concerned about cost-push inflation from commodity prices or demand-pull inflation from wage increases.
While the five-year inflation expectations of 64% of respondents remain anchored to the ECB target of 2%, there was a clear skew to the upside in the sample.
Thirty-six percent expect inflation to be 'significantly' above that level, while not one thought it would come in lower.
Thirty-four percent doubt that the ECB will achieve its goal of low and stable inflation.
Valentijn van Nieuwenhuijzen, chief economist at ING IM, said: "There is a clear indication from the survey that this is related to concerns that central banks have lost their inflation-targeting credibility, that balance sheets have been expanded and therefore we will see that money creation leading to inflation, at least at some point.
"The ECB has of course made some huge U-turns over recent months in terms of liquidity provision and unconventional market intervention measures such as purchases of peripheral Treasuries."
The findings appear to contradict ING IM's own house view, which expects lower-than-consensus inflation and a continued period of low bond yields.
"It's pretty obvious we are seeing global headline inflation rates peaking over the summer - even those houses that are more concerned about inflation agree on that," said van Nieuwenhuijzen.
"If there are real worries about inflation getting out of control, an easy monetary policy stance would push bond yields up - but we are seeing the opposite. Every time expectations about central bank hikes come down, the long-end of the curve rallies as much as the short-end."
Van Nieuwenhuijzen points to other survey responses that suggest institutional investors' fears are entirely grounded in a belief that inflation necessarily follows monetary expansion, regardless of underlying fundamentals.
While it is not surprising that the highest upside risk to inflation was seen to be in the emerging economies, asked to describe expectations for Europe, the UK and the US respondents saw the lowest upside risk in the UK - suggesting there is some agreement with the Bank of England's argument that the UK's elevated inflation is a temporary phenomenon.
Like the BoE - but unlike the ECB - the survey respondents were neutral about the impact of commodity prices on inflation: 30% thought they would contribute to higher inflation, but 20% felt they would have very little impact at all.
Most tellingly, expectations for wage growth over the next five years were very modest: 73% agreed with a target set at 2%, with the rest split more or less evenly above and below that.
Assuming at least some productivity growth, 2% wage growth would still be disinflationary.
"The structure is not in place in the developed economies to see a wage-price spiral, and the outcome of this survey seemed to confirm this," said van Nieuwenhuijzen.
Are investors right to be concerned about ECB credibility? Van Nieuwenhuijzen argued that the bank was trying hard to separate its actions to shore-up euro-zone systemic stability from its interest-rate setting responsibilities, and he said he had a "strong conviction" it would continue to do so.
It needs to allow incoming president Mario Draghi to establish his credibility, and in any case, its culture remains "very Bundesbank-like". That, rather than rising inflation, is what concerns him.
"This builds a very strong case for assuming that the ECB will be very stringent in its approach to inflation - perhaps to the detriment of the euro-zone as a whole, which needs a little more flexibility to help it deal with the enormous systemic issues," said van Nieuwenhuijzen.
"From a macro-prudential perspective, tightening now amounts to a policy error by the ECB. The Greece problem on its own is not the issue - it's the fact that, for example, 70-80% of Spanish mortgages are directly tied into overnight rates.
"Given that sort of exposure, you can't argue that raising short-term rates by 25 basis points won't have an effect on the systemic risk of the euro-zone."