The U.S. inflation rate should be in the 1.5% to 2% range in the next 12 months, compared to the current rate of 1.4%, Mohamed El-Erian, CEO and co-chief investment officer of Pacific Investment Management Co., said on Monday.
“Inflation is not an issue today or for next year,” Mr. El-Erian said in a speech at the Pensions & Investments West Coast Defined Contribution Conference in San Francisco. “Inflation is an issue for the medium term.”
Mr. El-Erian's inflation forecasts for other economies in the next 12 months include China at 3% to 3.5%; U.K. at 2% to 2.5%; Japan at zero to 0.5%; and the eurozone countries at 0.75% to 1.25%.
Although near-term inflation appears to be modest, Mr. El-Erian warned that four major economies — U.S., China, Japan and the eurozone countries — face a potential serious challenge in the next five years.
The challenge is what economists call a “T” junction. It is analogous to a driver in a car heading straight on the road that eventually requires a right-hand turn or a left-hand turn.
In economic terms, these four economies must make political, central bank and economic decisions that will take them to either sustained growth or to weak growth and financial instability, he said.
“This is the first time Japan, the eurozone, the United States and China are on the way to a T junction,” Mr. El-Erian said.
Capital markets have been “heavily influenced by central banks in experimentation mode,” he said. But they are operating “without a playbook, tested models or historical examples.”
As major economies deal with the economic and political issues, Mr. El-Erian said there are several implications for investors.
“Traditional sources of returns are likely to be muted, while periods of heightened volatility are expected,” he said.
In addition, “activist central bank policies may lead to higher long-term inflation,” he said. “Markets are even more challenging to navigate.”
These issues pose problems for retirees seeking stable sources of income and trying to protect their purchasing power, Mr. El-Erian said.
As a result, he predicted individuals would have to save more to achieve retirement security. Portfolio agility and active management will become more important, he said.