Morgan Stanley warns that the vast sums of money put into keeping people in work and supporting those that have been made unemployed could soon cause inflation to spike.

“With the U.S. and global economies in the midst of one of the deepest recessions and output gaps on record, most investors we speak with have dismissed our call for higher inflation risks,” Morgan Stanley said on Sunday in a research note, CNBC reported.

“However, it’s the fiscal response that’s really different this time,” the bank said, drawing a comparison to the 2008 crisis.

“Congress is now in the driver’s seat when it comes to the money supply with its fiscal programs… This is potentially more inflationary than appreciated, which means that back-end rates can rise,” Morgan Stanley said.

“Very few portfolios are prepared for such an outcome. Such shifts can happen quickly when they are so unexpected,” the bank added.

Meanwhile, the Federal Reserve reportedly soon will be solidifying a policy outline that would commit it to low rates for years as it pursues an agenda of higher inflation and a return to the full employment picture that vanished as the coronavirus pandemic hit.

Recent statements from Fed officials and analysis from market veterans and economists point to a move to “average inflation” targeting in which inflation above the central bank’s usual 2% target would be tolerated and even desired, CNBC reported.

"To achieve that goal, officials would pledge not to raise interest rates until both the inflation and employment targets are hit. With inflation now closer to 1% and the jobless rate higher than it’s been since the Great Depression, the likelihood is that the Fed could need years to hit its targets," CNBC said.

• Fed Could Be Setting Us Up for Explosive Price Inflation
• Soaring Food Prices May Signal Return to 'Inflation Nation'