More and more strategists believe that investors are underestimating the outlook for consumer prices.
David Roche, president of the investment firm Independent Strategy, is one of them. He told CNBC on Wednesday that the U.S. inflation rate, which stood at 2.6% in March year-over-year, could rise much higher.
“I think we will see inflation likely to be 3 or 4% by the middle of next year, which is totally in contradiction to the fact that, for example, 10-year US bond yields are 1.6%. That yield could be easily double, and when then you get to the point that the markets are going to see, “he told CNBC’s” Squawk Box Europe “.
“The reason prices are going to go up, and there are actually a couple of things, is that you will have tremendous demand on the other side of Covid as consumers spend the excess savings they have accumulated,” he said.
“And you will end up with great government forever … and of course that is less efficient and less efficiency means higher inflation.”
Traders on the floor of the New York Stock Exchange.
Roche’s comments come amid heightened discussion about the direction in which inflation will go. Rising inflation is one of the biggest problems the market is currently facing as high prices could affect assets and business margins, and limit consumer purchasing power.
US Federal Reserve officials monitor inflation. The latest data shows that the consumer price index rose by 0.6% in March compared to the previous month and by 2.6% compared to the previous year. Fed policymakers believe any hike will be temporary. They say they have tools like raising interest rates to combat it when it becomes a problem.
However, Roche said the Fed would be “behind the curve”. “It’s going to mix up what it calls temporary inflation and try to somehow gloss over it while effectively creating a much longer-term inflation problem,” he said.
In any case, with the world economy reopening after the coronavirus pandemic, a spike in inflation is seen as inevitable. Markets have priced in rising inflation to some extent, and US Treasury bond yields have risen over the past six months.
Earlier this week, Richard Bernstein, CEO and CIO of Richard Bernstein Advisors, told CNBC that he had seen a lot of rejection of inflation risks, which is reflected in the current position of investors.
“Think about what people love. They currently love long-dated stocks,” he told CNBC’s Trading Nation on Monday. “That shows that people are ill-prepared for this higher inflation.”
“What is the likelihood that we will see higher inflation than people think? We think the likelihood is pretty good,” he added.
– CNBC’s Stephanie Landsman contributed to this story.