The United States is heading into a period of sustained high inflation that will be especially severe because of 'tremendous complacency' among policy makers, according to Tim Drayson, an economist at Legal & General Investment Management.
He argues that booming emerging market economies are exporting inflation to the US at a time when the US Federal Reserve is more concerned with bringing down unemployment, an approach that risks weakening the dollar and pushing up prices for US consumers.
The inflation question reveals a divergence of opinion between the Fed and the European Central Bank (ECB), which has taken action to control inflation.
“The Fed and the ECB are definitely not reading the same macroeconomic textbook,” commented Drayson.
He argues the Fed is making a “policy error”, while the ECB “seems committed to maintaining the purchasing power of the euro”.
Drayson said investors should buy inflation protection now, while it is still cheap. He recommends Treasury inflation protected securities (Tips), a type of inflation-linked bond.
Non-linked US government bonds are likely to offer very poor value because inflation means their real yield is very low. “I am extremely bearish about the US government bond yields,” said Drayson
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