Inflation could be on the horizon, possibly undermining the current bull market in stocks, suggests Montreal based BCA Reserch.

“There are a few very early signs that suggest a subtle shift from reflation to inflation could develop sometime in early 2005,” the independent investment research firm noted in a report released today. “If so, the monetary conditions will fall into place for an end to the equity bull market.”

“Oil prices continue to recede and should remain weak, increasing global spending power. The bond-to-gold ratio is reaching an important threshold. Further declines would suggest a reversal of the previous 25-year secular bull market, indicating inflationary pressures,” it says.

And, “The overall trade-weighted dollar is closing in on our measure of purchasing power parity. Declines below this level are a symptom of U.S. inflationary policy.”

“Dollar weakness is very stimulative for China and has forced credit markets to stimulate other major countries. Currency intervention or rate cuts at this stage could produce a big-enough bulge in reflation to lift inflation, even if temporarily,” it warns.