Investors are underestimating the scale of rate hikes needed to tackle inflation given upward pressure on prices, according to Deutsche Bank AG strategist Henry Allen. The "fundamental dislocation" between the outlook for limited interest rate rises from the US Federal Reserve and European Central Bank and growing inflationary pressures looks unsustainable, he said. The US ISM services index Bloomberg Terminal suggests prices paid for raw materials and other inputs are rising at a rate last seen in the wake of the pandemic, when US CPI inflation was running at 5%.

Allen argues that market expectations for monetary policy are misaligned with underlying economic fundamentals, creating a risky imbalance that could correct sharply if inflation persists. He emphasizes that current pricing in bonds and rates does not reflect the likely trajectory of central bank action required to bring inflation under control. The strategist warns that complacency among traders could lead to significant market adjustments once the true extent of tightening becomes apparent.

His comments highlight growing concern among analysts about the durability of recent inflation declines and the need for more aggressive policy responses.