Investors may be forced to rethink investment strategies that centre on the rosy prospect of low inflation as key central banks look set to renew pledges to print money in the coming week.
Outperformance of developed market assets relative to their oversubscribed emerging counterparts this year partly reflects a sentiment shift for investors, who are becoming uneasy about inflation in the rapidly growing developing world and an as-yet muted policy response.
Price pressures are becoming increasingly observable even in developed economies. UK inflation hit an 8-month high of 3.7 percent last month, prompting investors to price in a rate hike by mid-year.
Higher energy prices have pushed eurozone inflation to 2.2 percent, above the European Central Bank's 2 percent target. The Fed and Bank of Japan are expected to stick to their quantitative easing policies when they meet in the coming week while the Bank of England minutes are likely to reveal no change in its promise to keep its asset purchasing programme on standby. Even the ECB, whose President Jean-Claude Trichet has warned of price pressures, is unlikely to raise rates immediately.
However, further price pressures may challenge the investor perception interest rates would remain at current low levels for a foreseeable future - which could in turn hit equities.
A net 72 percent of fund managers polled by BofA Merrill Lynch this month expected higher inflation in the next 12 months, the highest reading in almost 5 years. At the same time, they have pushed back expectations for the first Federal Reserve rate rise well into 2012.
World stocks on a MSCI measure have risen more than 1 percent so far this year, adding to their gain of 10 percent last year. Their emerging market counterparts lost 1.3 percent, having risen 16 percent in 2010.
The emerging MSCI index was on track for its biggest weekly drop in nearly two months in the past week.
Stocks in India and Indonesia have come under pressure in recent sessions as investors grew concerned that monetary authorities may be behind the curve in tackling inflation.
In Turkey, which shocked markets by cutting interest rates on Thursday, concerns about inflation pushed benchmark yields to their highest level since early December.