NEW YORK (CNN/Money) - Global fund managers are increasingly worried that the Fed has fallen behind the curve on inflation and are losing their appetite for risk, moving into safe, defensive investments, according to a Merrill Lynch survey released Tuesday.

A net eighty-six percent of the fund managers surveyed by the firm in the second week of May expect inflation to rise in the next 12 months, Merrill said.

More than half of the 280 managers said global central banks, including the Federal reserve, were too stimulative, compared with just a third holding that view a month ago.

"All the warning signs that had been detected in recent surveys have come to a head," David Bowers, Merrill's chief global investment strategist, said in a release. "There is now a deep-seated view that core inflation is on the rise and monetary policy should be tightened. This comes at a time when global growth expectations are already softening."

Correction The percentages reported in this story were initially reported as total percentages. For example, it was originally reported that just 9 pecent of managers thought the economy would improve, when in fact that 9 percent was the difference between the percentage who thought it would improve and the percentage who thought it would worsen. We regret the error.

Forty-seven percent of all managers expect the global economy to improve, while 38 expect it to get weaker in the coming year. The net difference, 9 percent, is the lowest since April 2001, when a recession was in its early stages.

Only 26 percent of managers, on net, expect corporate earnings to improve in the coming year, compared with 47 percent in April.

Fund managers are most worried about the potential for an economic slowdown in China, along with higher oil prices and geopolitical strife.

With all that in mind, risk aversion has taken hold in fund managers' psychology. Thirty-one percent of managers say they're accepting lower-than-normal levels of risk, compared with just 18 percent a month ago. More than a quarter say they are overweight cash.

Managers trimmed their equity allocation to 52 percent from 55 percent in April and raised their cash allocation to 4.5 percent from 3.8 percent in April.

Managers have also quickly moved out of technology and financial stocks and into staples and pharmaceuticals. Thirty-one percent of all managers said they had lower than normal risk, compared with 18 percent in April.

The flight from risk has been most evident in emerging market stocks. In April, 57 percent of managers said they were overweight emerging-market equities. That number plunged to 20 percent in May.

The survey is just the latest evidence of a shift in psychology that's been taking place for several weeks, since stronger U.S. economic data led markets to believe a Fed tightening was on the way.

Earlier this month, Merrill said its own proprietary Risk Posture Barometer has been falling since January, and chief small cap strategist Satya Pradhuman suggested then that risk appetites historically take 15 months to stabilize, on average -- in other words, it could be spring 2005 before investors feel like taking risks again.

In the meantime, volatile shares with high potential returns could continue to suffer, while traditional defensive stocks could keep winning. If that's the case, then total stock returns will be muted.

Much of this shift in risk-taking has to do with the Fed. With central bankers keeping interest rates at the lowest level in more than 40 years, investors felt safe taking bigger chances. Now that the Fed is almost certain to raise rates -- most investors believe this will start at the end of June -- the fear is that the best days are over for the economy, corporate earnings and stocks.

"My concern is that what's happened here is that inflation is higher than the Fed anticipated," said Alan Ruskin, research director at 4CAST Ltd., a market and economics research firm. "On top of that, the kind of tightening already imposed by the markets, in terms of lower equities and higher bond yields, is setting up weaker growth in 2005."

"That mix is the least conducive in terms of risk appetite," he added.

On the other hand, if everybody's sentiment is moving in one direction, that could mean it's time to move in the other.

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"There's a bias, because of the bubble-popping, to be negative no matter what after we've had a good rally, because you don't want to be accused of being too optimistic," said Tony Dwyer, equity market strategist at FTN Midwest Research.

Dwyer pointed out that markets reacted badly to the prospect of Fed tightening in 1994, as well, and then corporate earnings ended up gaining some 18 percent for the year. Stock prices, appropriately, prospered in the following years.

Dwyer suggested that now might be the time to jump, at least temporarily, into battered sectors such as financials and tech, so you can sell them again on the bounce he believes is coming.

"I look at it from a risk/reward standpoint -- I think the risk is limited and the reward substantial, given earnings," he said. "In 1994, the Fed didn't stop the economy, and earnings didn't decline."