With U.S. inflation at 40-year highs, people are hoping that gravity will bring it back down to earth sooner than later. And it eventually will, but probably not as quickly as desired, according to some market strategists.
The U.S. Labor Department this week announced that the consumer price index, which measures price changes for a broad basket of goods and services, zoomed to 8.5% in March versus the year-earlier period, marking the highest increase since December 1981. And the core price index, which excludes energy and food, two of the leading drivers of the current inflation surge, rose 6.5% versus the prior March.
This is way above the 2% inflation target set by the Federal Reserve, which misjudged the impact of the economic reopening from the global pandemic.
“A year ago, inflation was supposed to be transitory,” said Jeffrey Gundlach, CEO of investment management firm DoubleLine. “The only thing that was transitory was the use of the word transitory. Now it’s just a question of what the peak is going to be.”
Gundlach, along with other speakers at this week’s Exchange ETF conference in Miami Beach, Fla., addressed the inflation picture and its potential impact on interest rates and the economy. He noted that inflation is a global phenomenon, with every region in the world experiencing very sharp inflation surprises during the past year and a half.
And not coincidentally, he said, that’s in sync with the rise in commodities prices.
Gundlach said he believes inflation will fall in the months ahead on a year-over-year basis, but he doesn’t buy the argument made by some people at the Fed that inflation will recede to the 4%-plus range by year end.
“I would bet a lot that the CPI won’t get as low as a four handle this year,” he said. “We think it will be 6%, maybe in the high fives. A lot of that will depend on energy, and the price of energy has a lot to do with recessions. Most recessions are preceded by a spike in energy prices because energy prices percolate through the entire economy.”
He added that if oil remained north of $100 a barrel on the WTI Index (it closed Thursday at $106.54), he expects the CPI to be up about 6% for 2022.
Richard Bernstein, CEO and chief investment office at Richard Bernstein Advisors, offered that the retreat from globalization will be a factor in sustaining higher prices than we’ve enjoyed in recent years.