The post-2008 deflationary period is dead, as 2017 sees a return of inflationary pressures, according to a number of market gurus.
In year-end market outlooks, several notable prognosticators seem united in predicting higher inflation and interest rates in the U.S., driven by rising commodity prices and tight labor markets.
Higher spending and tax cuts from a new Trump administration will add to inflationary pressures, they say.
--“The post-bubble secular period of deflation and slow nominal growth now seems to be ending, and re-inflation could be a prime investment theme for 2017,” says Richard Bernstein, founder of Richard Bernstein Advisors, in a report this month.
--“Markets have woken up to our long-held view that inflation risks over the secular horizon were seriously underappreciated and underpriced,” says Pimco in a report this month.
--“Inflation has joined the party,” echoed Jeffrey Gundlach, chief executive at DoubleLine Capital, in his latest webcast this month.
--“The battle with deflation in much of the world looks to be over. The rise in
inflation is increasingly broad-based − particularly in the U.S.,” wrote analysts at the BlackRock Investment Institute.
--“We are expecting higher inflation and interest rates despite a relatively lackluster economy,” said Robert Johnson, director of economic analysis with Morningstar.
Analysts note that the constituents making up the CPI index are now all on the rise.
Food and energy costs have been holding down inflation numbers, but that’s about to change, Gundlach said. “Going into January, that oil number will have something like a 100 percent [year over year] gain, and will likely lead to a higher headline inflation” of close to three percent on the CPI, he said.
Johnson says wage and commodity inflation could push the headline CPI number to more than 3 percent by the end of 2017, from 1.9 percent currently.
Higher inflation numbers should give the Fed room to raise rates further in 2017—perhaps more than the markets expect.
Given the expected inflation pressures, inflation-linked bonds are favored among the prognosticators.
BlackRock also suggests focusing on companies with sustainable free cash flow and the ability to raise dividends.
“Dividend growers perform well when inflation drives rates higher,” BlackRock analysts said.