PIMCO's Mihir Worah says that it's time to wake up and understand the new dynamics affecting inflation in 2011 and beyond, which he explained in a commentary piece for the fund group on Monday. Overall, he expects inflation to average between 3% and 5% a year worldwide.
Worah (left) says "the goldilocks days of the '90s," when countries could have both strong economic growth and low inflation at the same time "are gone." While in the '90s and afterward, emerging markets could export disinflation to developed markets, the situation today is "turning around" as emerging markets go through "a particularly commodity and energy intensive phase of growth," the portfolio manager explains.
"Inflationary pressure from commodities will be even higher within emerging markets … [since] commodities are such a large part of their consumption basket – for example, nearly 60% in India, compared to about 25% in the U.S.," he wrote in an opinion piece released by PIMCO on June 27.
"Rising commodity prices along with reflationary policies from many developed-market central banks should result in modestly higher inflation going forward," Worah added. "We expect developed market inflation to average about 3% and developing market inflation to average about 5% over the secular horizon."
Another factor driving inflation today is that policymakers in the developed world are expected to "make their economies more competitive via a cheaper currency, which likely will, for net importers like the U.S., lead to higher inflation," said Worah, who trained as a physicist.
As emerging economies cope with their own inflationary pressures, they may follow let their currencies appreciate. "This is another channel by which emerging markets may export inflation to developed nations that buy their goods," the PIMCO real-returns guru explained.
