Where does PIMCO fall on the inflation-deflation debate in the near-term?
Worah: In short, we are not in the deflation camp. In the near-term, while we don’t see run-away inflation as an imminent risk, we also don’t see deflation in our base case. We see near-term inflation stabilizing around the current 1% level, anchored by stabilizing rental prices in the core CPI. Even though markets were expecting a V-shaped recovery and higher inflation early in the year, we remained guided by our New Normal views. Specifically, we saw the triple forces of de-leveraging, de-globalization and re-regulation creating a structural headwind to growth. With waning fiscal stimulus that in Q3 2010 actually became a net drag, our view was that an L-shaped recovery, characterized by lackluster growth and modest disinflation, was most likely. And that’s just how things played out. Even if deflation occurs, we think it will be relatively mild, short in duration and likely driven by some shock to aggregate demand. When inflation is at 1%, it’s not too difficult to get below zero, b
