The days of sub 2% inflation — as measured by the Consumer Price Index (CPI) — look over for quite some time, thinks DoubleLine’s co-chief investment officer Jeff Sherman.
Sherman assigns the blame to the ongoing COVID-19 pandemic, and in part the extremely easy monetary policy employed by the Federal Reserve to gin up the economy throughout the health crisis.
“I don’t think we are going back to the old school one and a half to 2% inflation because it’s permeated the psyche for a period of time. And so I think we are going to have to deal with higher levels of inflation, and the front end of the bond curve is telling you that if you look at breakeven spreads. Long-term still, you look at 10-year breakevens they are at 2.5%. It has priced in an elevated level of inflation for the next couple of years,” Sherman told Yahoo Finance in an interview.
Sherman expects headline inflation to clock in at 4% this year. He added the upcoming CPI release out next week could hit 7% on the headline.
To be sure, investors bore witness to eye-popping levels of inflation in 2021 as workers (in short supply) demanded higher wages, ports were clogged due to the pandemic, home prices ripped higher and gas prices marched upward.
In November, the headline CPI clocked in growth of 6.8%. That marked the fastest rate of inflation since 1982.
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In light of these inflationary pressures, the Federal Reserve is expected to lift interest rates later this year.
DoubleLine’s founder and CEO Jeffrey Gundlach told Yahoo Finance he is concerned about what the bond market is saying in front of rate liftoff.
“We have the highest two-year yield of the past year. We have the highest three-year yield. We have basically a high on the five-year yield. And so what’s happening is the yield curve is sending a bonafide recessionary signal. You have interest rates going up at the short end and going down at the long end,” said Gundlach.