Wall Street banks are preparing for a prolonged period of higher inflation by conducting internal health checks, monitoring whether clients in vulnerable industries can repay loans, devising hedging strategies, and advising caution when it comes to deals.

Consumer prices in the United States increased by the most in 31 years this month, owing to increases in the cost of gasoline and other goods.

Senior bank executives are less convinced by central bankers' claims that the spike is a temporary blip caused by supply chain disruptions and are tightening risk management.

Higher inflation is generally regarded as a positive for banks, as it increases net interest income and profitability. However, if it rises too quickly, top bankers warn that inflation could become a drag.

Inflation, according to Goldman Sachs Chief Operating Officer John Waldron, is the No. 1 risk that could derail the global economy and stock markets.

Last month, JPMorgan CEO Jamie Dimon told analysts that banks "should be worried" that high inflation and interest rates increase the risk of extreme price movements.

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A sustained period of higher inflation would pose credit and market risk to banks, which are assessing that risk in internal stress tests, according to one senior banker at a European bank with significant operations in the United States.

Investment bankers are also evaluating whether higher inflation and monetary tightening will disrupt record deals and IPO pipelines. "We expect a sustained period of higher inflation, and monetary tightening could slow the momentum in the M&A market," said Paul Colone, U.S.-based managing partner at Alantra, a global mid-market investment bank.

"We're seeing more interest from clients in finding some manner of inflation protection," said Chris McReynolds, Barclays' head of U.S. inflation trading.

Most analysts believe that banks with diverse businesses will fare best during a prolonged period of inflation.

They anticipate that a steepening yield curve will boost overall profit margins, while trading businesses will benefit from increased volatility and deal strength, and IPO pipelines indicate that investment banking activity will remain healthy.

However, Dick Bove, a well-known independent banking analyst, holds a different opinion. He expects the yield curve to flatten as interest rates rise, lowering inflation expectations and squeezing profit margins.

"Perhaps for as long as 12 to 18 months, bank stock prices will rise," he said. "At some point, however, if inflation continues to rise, the multiples on bank stocks will collapse and so will bank stock prices."