“Fears regarding the beast of higher inflation are likely overblown: we can get him back in his cage,” said Michael Dicks, head of research and investment strategy, Barclays Wealth.

“As the US housing market adjustment shows, time is a natural healer, and inflation pressures will peak before year-end.  So long as there is not another surge in oil prices, this should entail some further recovery in stock prices. Thus we continue to recommend a small overweight of equities versus bonds, with the United States still looking to us like one natural place to be overweight,” Mr Dicks said.

Mr Dicks said Barclays Wealth is “generally gloomy” about growth in 2008. It has, however, revised up its 2008 US GDP growth forecast to 1.3 per cent, and its expects a further slight rise in US growth in 2009, although growth in the UK and Euro area will fall.