Inflation in Context: Current and Longer-Term Outlooks

David Braun, portfolio manager, recently joined The Exchange with Douglas Yones, Head of Exchange Traded Products at NYSE, and Robert Trumbull of J.P. Morgan. They discussed the current factors driving inflation, PIMCO’s near- and longer-term inflation outlook and implications for investors.

More from this section

Read Transcript

Image: NYSE logo, The ETF Exchange with Douglas Yones,

Text on screen: Douglas Yones, Head of Exchange Traded Products, NYSE

Yones: Hello, and welcome to today's edition of The Exchange, brought to you by the NYSE. I'm Douglas Yones, your host. I'm joined today by David Braun. He is the U.S. Bond Portfolio Manager for PIMCO, and Rob Trumbull, a wealth advisor at J.P. Morgan Wealth Management. Gentleman, thank you for being here.

As a reminder, today's interview is for informational purposes only. The NYSE does not recommend investments or investment strategies.

David, I want to get right into this with you about inflation. The outlook is top-of-mind. We're hearing about it, we're reading about it. For all investors, what is PIMCO's growth forecast for 2021? And if you wouldn't mind maybe sharing a little bit of some of the key drivers that you're thinking about as we look towards a recovery ahead.

Text on screen: David Braun, US Financial Institutions Portfolio Management and ETF Portfolio Manager, PIMCO

Braun: Thanks for having me, Doug. At PIMCO we're actually very constructive on growth in 2021. We're calling for U.S. growth to be north of GDP this year, which, yes, is off of a very low base rate from last year where we shrunk by about 3.5%, but when you think about a 7% number on real GDP growth, that hasn't happened since the mid-eighties.

So this is a profound growth year. It doesn't really happen that often in developed economies, such a robust growth rate, and we're really seeing three main engines that drive that growth rate.

Image: TITLE – Strong recovery driven by fiscal, monetary and public health policies. Three graphs are shown: 1. TITLE accelerating vaccinations. A line graph shows the cumulative vaccinations per 1m population increasing in the Euro area, UK and US. 2. TITLE  Significant fiscal support. A bar graph shows fiscal deficit forecasts (% GDP) for US, Euro area and UK in 2020, 2021 and 2022. 3. TITLE  Central banks stay the course. A line graph shows central bank policy rates (%) for DM and EM.

First is accelerated vaccine rollout and what appears to be a pretty successful vaccine rollout here in the U.S.

So the math there goes as we get more and more people vaccinated and the economy starts to more broadly reopen, both consumers and corporations feel a lot more confident spending their money. So that fuels up the release of the pent-up demand we've been hearing about for over a year now.

Second is very active fiscal policy. You see the deficits being run out of Washington. That is very powerful in propelling the economy forward with all that fiscal spending. And second is accommodative monetary policy.

We've got the Federal Reserve pegging the Fed funds rate at zero and growing its balance sheet to above $8 trillion with quantitative easing. That provides an economic backdrop where financial conditions are very accommodative. Those three factors, in our mind, lead to a very strong growth year in 2021.

Yones: So let's get back a little bit into the inflation. When you start to look at all those methods of growth, are there factors that drive inflation combined? Are those growth factors? Will they accelerate? How should we be broadly thinking about the idea of inflation?

 Braun: So, look. We think we're in the midst of a multi-month period where inflation data is going to come in very robust and, quite frankly, higher than central banks targets. However, that said, we think it's largely going to be fueled by many one-offs or transitory, as the Fed calls them, drivers of that growth.

So we'll give you four drivers that are going to cause the next few months to really have elevated inflation [princ]. We saw this last month, and get ready to see it for the next coming months.

Image: TITLE – Inflation: Bumpy near-term path likely, rising longer-term uncertainty. Two charts show factors and impacts. 1. TITLE – Short term inflation head fake… BULLETS – Base effects, rebounds in COVID-sensitive sectors, supply chain disruptions and low inventories, commodity price recovery; but most of these are one-offs. 2. TITLE – but two-way longer term risks. BULLETS – Active fiscal policy, expansive monetary policy, deglobalization, still far from maximum employment, flat Phillips Curve/weak bargaining power, accelerating automation and digitalization.

First is the base effects.

That's economic jargon meaning that as you look at a 12-month window of inflation, if you've got the disinflationary months from second quarter of 2020 immediately after the coronavirus pandemic hit, that's going to be dragging up any 12-month [princ] because you've got such depressed numbers at the start of the 12-month window.

Second is as the economy reopens, the sectors hit hardest by COVID—so think about hospitality, travel and leisure, gaming—are experiencing significant inflation and fueling the near-term inflationary impulse higher.

Third is the supply chain disruptions and low factory inventories, as we've heard about, whether it's factories having been shuttered during the coronavirus, whether it's companies running their inventories incredibly low because they were worried about the pickup in demand. That's led to a shortage in a lot of key supplies, in a lot of key goods that we need. That's causing inflationary pressure.

And then finally we're in the midst of a big commodity price recovery the last 12 months where energy and agricultural commodities, as well as raw materials like lumber, have seen significant price rise. So that's causing the next several months of inflation high.

Now why do we think that's transitory? It's because if you look beyond the next few months we think the risks are more balanced to inflation. I'll give you three things that are [going to] cause inflation to kind of have a propensity to be higher and three that are going to cause it to kind of be lower.

First, on the higher side, active fiscal policy, as I already mentioned, and accommodative monetary policy are the first two. We get the math and the reason why people want to connect those dots. You print a lot of money and you run fiscal deficits. That could sow the seeds for higher inflation in years to come.

The third thing that could cause inflation to be higher longer term is this trend towards deglobalization. We saw this even before coronavirus happened, whether it was trade wars, tariffs, the desire to move supply chains and manufacturing more back home. That's inflationary.

But counterbalancing that are three powerful forces. One, we're still far from maximum employment in the U.S. We at about 6% unemployment right now. Before coronavirus we were sustainably, for a few ears, below 4, bottoming out at 3.5. So there's a lot of slack in the labor market.

Second, even when we were at maximum employment before coronavirus at that 3.5% unemployment, labor had a tough time bargaining for higher wages. So even if we get back there, which is not our forecast for another couple of years, it's not a guaranteed proposition that inflation is going to go higher because wages are going to go up.

And then third, the automation and digitalization of our economy is well under way. This was going on before coronavirus. Whether it's the Amazonification of how we consume as a retail society or the use of digital technology to make businesses and companies more efficient, that's disinflationary.

So when we add the longer-term ledger we think the risks are more balanced, and that leads to an environment where, after the next few months of high inflation princ, we'll probably trend back down towards inflation numbers more consistent with Federal Reserve and central banks targets.

We do acknowledge that, given everything going on here, there is uncertainty, and the [wings] of inflation have certainly been exacerbated where you could see a breakout higher or breakout lower, but our base case is for high inflation near term trending back towards Fed targets over the longer term.

Yones: So, Rob, I want to come back to you. In your role of making these portfolio allocation decisions for your clients, how conscious are they of this inflation conversation we're having, and are they making any demands from you as a result?

Text on screen: Robert C. Trumbell, Vice President, Wealth Advisor, J.P. Morgan Wealth Management

Trumbull: Yeah, Doug, thanks for having me. It's great to be with you, David. Look, at the end of the day a lot of our clients are corporate executives or business owners, and they're seeing increases in the input costs for their businesses. That's really how a lot of the conversations start for us with our clients.

I would say from an investment standpoint we're big believers in communication and keeping our clients informed. We send out a weekly note to all of our clients that is really digestible and helps them distill the latest key market drivers. And obviously there's been a lot of press about inflation lately. So it is something that's been on people's minds.

I would just share David's sentiment. We have a similar view here at J.P. Morgan. At the end of the day economic growth numbers, we expect them to dazzle over the next six months as the expansionary policy continues to play out.

But we do believe that some of the high inflation numbers that we're going to be seeing are somewhat transitory, as the Fed has outlined. We believe that the current spike should subside as the economy normalizes, for a lot of the same reasons that David just mentioned: the labor market slack and things of that nature.

We believe that we'll be looking at closer to the 2% average in the medium term that the Fed has outlined, but clearly it's something that is not unique in terms of view in the marketplace today. You look at the recent Bank of America fund manager survey. Sixty-nine percent of all asset managers predict higher-than-average inflation. So there's an expectation that the economy is going to run hot, but we believe a lot of that's already in the price.

Yones: As a reminder, you can find this episode alongside a lot of other episodes of educational content on our website home of David, Rob, thank you very much for joining us. That's a wrap on the latest episode of The Exchange, brought to you by the New York Stock Exchange, the home of ETFs.

Image: NYSE logo



All investments contain risk and may lose value.

Forecasts, estimates and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. There is no guarantee that results will be achieved.

Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice.

PIMCO is not affiliated with the NYSE or JPMorgan Wealth Management.

PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This material contains the current opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. ©2021, PIMCO

Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660, 800-387-4626.


Filters: Reset All


Close Filters Dropdown
  • Tags


  • Category


    Bond by Bond
    Economic and Market Commentary
    Investment Strategies
    PIMCO Foundation
    PIMCO Education
    View from the Investment Committee
    View From the Trade Floor
  • Order By


    Most Recent
() filters applied

Multimedia Finder

Filter By:
  • Bond by Bond
  • Careers
  • Economic and Market Commentary
  • Investment Strategies
  • PIMCO Foundation
  • PIMCO Education
  • View from the Investment Committee
  • View From the Trade Floor
  • Viewpoints
  • Understanding Investing
  • A
  • B
  • C
  • D
  • E
  • F
  • G
  • H
  • I
  • K
  • M
  • N
  • P
  • R
  • S
  • T
  • V
  • W
  • Z
Berdibek Ahmedov
Product Strategist
Robert Arnott
Founder and Chairman, Research Affiliates
Andrew Balls
CIO Global Fixed Income
Rachel Betton
Justin Blesy
Asset Allocation Strategist
Meredith Block
ESG Research Analyst
Allison Boxer
David L. Braun
Portfolio Manager
Jelle Brons
Portfolio Manager, Global and U.S. Investment Grade Credit
Nathaniel Brown
Director of the PIMCO Foundation
Erin Browne
Portfolio Manager, Asset Allocation
Grover Burthey
Portfolio Manager, ESG
Libby Cantrill
U.S. Public Policy
Kenneth Chambers
Fixed Income Strategist
Stephen Chang
Portfolio Manager, Asia
Devin Chen
Portfolio Manager, Commercial Real Estate
Richard Clarida
Global Economic Advisor
Mathieu Clavel
Portfolio Manager, Alternative Credit
Tony Crescenzi
Portfolio Manager, Market Strategist
Harin de Silva
Portfolio Manager, Special Situations
Pramol Dhawan
Portfolio Manager
Matt Dorsten
Portfolio Manager, Quantitative Strategy
Jason Duko
Portfolio Manager
Devin Ekberg
Senior Consultant, Advisor Education
David Forgash
Portfolio Manager
Preeyam Gandhi
Max Gelb
Product Strategist
Nick Granger
Portfolio Manager, Quantitative Analytics
Adam Gubner
Portfolio Manager, Distressed Debt
Bill Gurtin
Gregory Hall
Head of U.S. Global Wealth Management
David Hammer
Portfolio Manager
Daniel H. Hyman
Portfolio Manager
Daniel J. Ivascyn
Group Chief Investment Officer
Henry Kao
Account Manager, Stable Value
Mark R. Kiesel
CIO Global Credit
Erica Kinsella
Product Strategist, ESG Strategies
Sean Klein
Head of Client Business Strategy – Client Solutions and Analytics
Kristofer Kraus
Portfolio Manager
Brian Kyle
Global Wealth Management
Jason Mandinach
Head of Alternative Credit and Private Strategies
Kyle McCarthy
Alternative Credit Strategist
Lalantika Medema
Alternative Credit Strategist
Vidur Mehra
Product Strategist
Mohit Mittal
CIO Core Strategies
John Murray
Portfolio Manager, Global Private Real Estate
John Nersesian
Head of Advisor Education
Roger Nieves
Sonali Pier
Portfolio Manager, Multi-Sector Credit
Christina Pihos
Defined Contribution Marketing
Gavin Power
Chief of Sustainable Development and International Affairs
Chitrang K. Purani
Lupin Rahman
Portfolio Manager
Graham A. Rennison
Quantitative Portfolio Manager
Antonese Robertson
Global Wealth Management
Steve A. Rodosky
Portfolio Manager
Emmanuel Roman
Chief Executive Officer
Jerome M. Schneider
Portfolio Manager
Marc P. Seidner
CIO Non-traditional Strategies
Emmanuel S. Sharef
Portfolio Manager, Asset Allocation and Multi Real Asset
Greg E. Sharenow
Portfolio Manager, Commodities and Real Assets
Kimberley Stafford
Global Head of Product Strategy; Responsible for Sustainability Oversight
Jason R. Steiner
Portfolio Manager, Private Lending and Opportunistic Strategies
Christian Stracke
President, Global Head of Credit Research
Geraldine Sundstrom
Portfolio Manager, Asset Allocation, EMEA
Richard Thaler
Distinguished Service Professor of Economics and Behavioral Science at the University of Chicago's Booth School of Business
François Trausch
CEO and CIO of PIMCO Prime Real Estate
D. Alan Trice
Matt Tuten
Portfolio Manager
Chad Van Dyk
Global Wealth Management
Megan Walters
PIMCO Prime Real Estate
Qi Wang
CIO Portfolio Implementation
Jamie Weinstein
Portfolio Manager, Corporate Special Situations
Paul-James White
Portfolio Manager
Tiffany Wilding
Jerry Woytash
Portfolio Manager, Short-Term Desk
Kirill Zavodov
Portfolio Manager, Real Estate
Mike Cudzil
Portfolio Manager
Chris Brightman
Chief Executive Officer and Chief Investment Officer, Research Affiliates
Ryan Mulvey
Seray Incoglu
Portfolio Manager, Commercial Real Estate
Ben Bernanke
Chair, Global Advisory Board
  • Alphabetical
  • Most Recent
Section : Date : Experts :
Reset All
Opportune Time for High-Quality Global Bonds
Today’s Historic Opportunity in Actively Managed Bonds (video)
Celebrating International Women’s Day
Risks and Opportunities: Moving from Cash to Bonds
Macro and Markets Q1 2024
Economic and Market Commentary

Macro & Markets – Q1 2024 (video)

Macro & Markets – Q1 2024

Join us for PIMCO’s “Macro and Markets” webinar, a quarterly conversation where we help contextualize the fixed income market and share insights from PIMCO’s Cyclical and Secular outlooks. In this edition –inflation, employment are rate cuts; how a soft landing is possible but risks remain; how markets may have already priced in a cutting cycle; and monetary policy across the globe.
Watch and earn 1-hour of complimentary Continuing Education (CE) for CFP, CIMA, CPWA, and CPA.

Earn CE

Credit Outlook – Time for High Quality Bonds and Leveraged Loans (video)

Load more results Load {{cCtrl.fetchResults}} more results