Global inflation will accelerate gradually over the next few years towards central bank targets of around 2% with the US economy leading the way.
In a market commentary, Worah, who is CIO for asset allocation and real return at US group PIMCO, said Europe and Japan would lag behind the US, but deflation was unlikely to rear its head in the next several years.
‘As the economy has healed and the amount of slack has reduced, we might see the old definition of inflation reappear: too much money chasing too few goods,’ he said.
‘Unprecedented policy actions by major central banks, including the Fed, the European Central Bank and the Bank of Japan, have largely contributed to this diminished likelihood of deflation.'
Worah predicts the drivers of inflation will be more balanced and that services inflation will be supported by growing economies, higher wages and higher rents.
‘The key difference over the next five years compared with the past is that services and goods inflation will both be contributing to inflation, with much reduced volatility from the goods or commodity sector.’
He warned that there could also be short-term inflation spikes and that geopolitical conflict, or adverse weather conditions could push up the cost of living.
Super-cycle has stalled
Worah believes the ‘commodity supercycle’ of the early 2000s, where supply growth was unable to keep up with demand from a rapidly growing economy, is now over. Volatility in commodity prices will be muted as supply and demand are well balanced.
‘Prices across individual commodity sectors – oil, gold, industrial metals, grains – now are likely to respond more independently to idiosyncratic supply and demand factors, whether economic growth, geopolitics, weather or even shifting domestic policies and priorities.’
He predicts that oil prices will stabilise at around $70 per barrel of Brent crude due to shale and other unconventional sources and that the world will continue to consume about 1 million more barrels of crude oil each year than it did the previous.
‘With commodity prices steadier, we no longer expect to see gaps of the same magnitude and frequency between headline inflation and core inflation that characterised the past five or 10 years.’
The PIMCO GIS Global Real Return fund returned 3.6% in US dollar terms over the three years to the end of May 2015. Its Citywire-assigned benchmark, the Barclays World Govt Inflation Link TR GPBH, rose 6.4% over the same period.