Mihir P. Worah, Nicholas J. Johnson
Looking ahead into 2012, PIMCO expects modest inflation to continue, as last year’s pricing pressures have eased. But there are risks to that scenario, both to the upside and downside. Headline inflation, as measured by the Consumer Price Index (CPI) in the U.S., ran at 3.0% in 2011, up from 1.5% for 2010. The Core CPI, which excludes the volatile food and energy components, also accelerated from a 0.8% increase in 2010 to a 2.2% increase in 2011. As we look at the underlying components, we do not expect this trend of rising inflation rates to continue this year. Our base case is for inflation to moderate and trend lower from current 3% levels. However, there are a number of factors that could tip us either way – much higher inflation or even temporary deflation. Longer term our bias is toward higher inflation, and we feel any deflationary episode is likely to be short-lived, as the one we saw in 2008. ________________________________________
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