'We're not convinced there'll be persistent increase in inflation'

While accepting likely short-term rise, portfolio manager questions whether there will be a sustainable trend

'We're not convinced there'll be persistent increase in inflation'

Investors have been urged to keep an open mind when it comes to the prospect of rising interest rates and inflation, despite the consensus being that they are the headline risks as we, hopefully, head into a post-COVID-19 recovery.

Mark Lindbloom, portfolio manager at Western Asset Management, said the landscape remains uncertain but viewed the situation through two lenses – the short-term cyclical and secular.

The former is relatively straightforward in that Lindbloom expects inflation to go higher in the short run, mostly because of the so-called base effects.

He explained: “One year ago, as we were all dealing with the onset of COVID, we were seeing some very, very weak inflation [data]. People were worried about dis-inflation and deflation, not inflation. Those, of course, are dropping off in the next several months.

“Based upon that, the inflation numbers are going to be well in excess of 2%. This is not a surprise but this is something we are all dealing with.”

Beyond that, however, there is a bigger debate around the economy re-opening, and the subsequent strong service demand, especially with the Fed promising to keep interest rates in the zero-bound range and fiscal policies ramped up beyond what was originally considered before the Georgia elections.

Lindbloom said that having seen a rise in real interest rates – nominal interest rate minus inflation - the firm accepts that scenario but added it’s having problems longer term.

He said: “We're not convinced at all at Western Asset Management that we are entering a bear market in terms of interest rates based upon higher inflation, or that we're going to see persistently higher inflation, with an emphasis there on persistent not just the cyclical short-term impacts.

“Will the fiscal spending lead to higher inflation is an open question in our minds; witness Japan, witness Europe … this is a global conversation. We have to be mindful of how that fiscal [stimulus] will be spent and whether it will be borrowing growth from the future, with a huge debt overhang.”

Investors should also factor in the impact of the aging of our populations, the benefits of technology, and global trade, he added.

“We've heard 10 years ago that inflation is going up, five years ago that inflation is going up, and it could [now] be possible given the extraordinary things that we're all seeing currently bought. Our bottom line, though, is we're not convinced yet that we're going to see that persistent increase in inflation, at least over the next year or so.”