Inflation might have popped over 5% this year, but at least three asset managers appearing at the Morningstar Investment Conference in Chicago on Thursday said they saw inflation slowing sometime in the second or third quarters of 2022.
They provided ideas advisors could use in the meantime to either protect client portfolios from inflation risk or leverage that inflation for gain.
During a session called "How to Protect Your Portfolio Against Inflation," Morningstar manager research analyst Bobby Blue interviewed Nic Johnson, Pimco managing director and lead portfolio manager on its commodity funds; Catherine LeGraw, GMO asset allocation specialist; and Evan Rudy, DWS lead portfolio manager for its real asset strategy.
Here are six takeaways from these experts.
1. Inflation isn't too worrisome — yet.
Pimco's Johnson noted that "factors that are very localized and one-off price level adjustments … such as used cars" have been driving up the Consumer price Index in the past few months. He noted these type of jumps are more due to pent-up demand amid the economic reopening and supply chain issues, like semiconductor chip shortages.
"The question is how much of the spike [in inflation] will normalize back to the Fed's target of 2%," he said, adding that Pimco believes it's at peak now, and will "normalize" to 3%-3.5% or something closer to to 2%-2.5%.
GMO doesn't see inflation spiraling out of control, as workers lack "sufficient power" to cause continual wage increases, LeGraw said. In fact, one of her colleagues developed a "worker-power" index, and at this point, the index is "quite low relative to history," she said. "Now that could be in transition, but right now we really feel skeptical that wages are going to run out of control and inflation will take off."
2. Despite the escalating housing market, rents aren't matching the jump, and probably won't.
Rudy pointed out that in 2006-2007, housing prices rose 15%, while owner's equivalent rent rose about 4.5%. Today, median home prices are up about 17% while OER is up about 2.5%. He says it's possible that supply disruptions are "more persistent than we thought," which could cause higher inflation in the future, but he believes they will ease.
Johnson added that "lower interest rates increase home prices, but they create a more muted effect because it has a lower cost in servicing that asset, that debt on a home, and it means that rents don't have to rise as fast."
