Despite the fact that U.S. inflation seems to be dying right now, PIMCO’s Mohamed El-Erian remains concerned about the future explosion of inflation.
He’s worried about an even larger scale use of central bank balance sheets, similar to what was done in the U.S. and more recently in Europe.
We may have gotten away with such activities once, but in the view of Mr. El-Erian, we’ve used our ‘spare tire’ and won’t be able to repeat these kinds of central bank resources without substantial inflationary effects, among other consequences.
Some argued that given the output gap in industrial countries, it would be very difficult to generate inflationary pressures for the next three years. Indeed, the risks were tilted toward further disinflation. A larger group warned that while the output gap framework was applicable to the next 12 months, the period beyond that could witness the impact of increasing monetization of debt, gradually rising inflation rates and a worsening of inflationary expectations.
This potential evolution – from disinflation to inflation – will likely proceed at different speeds in different parts of the globe. It is already well in train in emerging economies and will remain so. Over the medium term, the U.S. will be next, with Europe and, even more, Japan lagging.
So in fact, he appears to believe that current U.S. disinflation (low, falling inflation) is only the lull before the storm. If that’s the case, then a lot of people have been tricked, as shown by the low treasury yields right now. The 10-year treasury is at just 3.21% right now, which doesn’t leave much room for inflation over the next 10 years.
Also, check out our easy guide to Quantitative Easing And Why It’s One Of The Largest Risks Right Now >
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