In a research paper titled What Goes Up, Can Go Down—How Durable Is the Recent Recovery in Global Inflation Rates? Western Asset portfolio manager Richard Booth is sanguine about the inflation outlook in developed countries. Western Asset has also nominated inflation linked European debt issues as their preferred bonds for investment.

He says: “Global inflation has recovered, and shows signs of a more durable and reliable stability—a welcome respite for policymakers and investors alike. This has important consequences for policy, and of course for markets.

Until recently global central banks emphasis has been upon avoiding deflation rather than restraining inflation. Last year’s US election result changed this, fostering a fiscally led inflation theme.

“Global inflation expectations and break even inflation spreads rallied in March this year.

“However at Western Asset we remain unconvinced. We see three major building blocks for global inflation as Core Goods, Core Services, and Energy and Food.

“The dominant driver of the recent increase in inflation is energy base effects, while the more positive tone from core goods and services percolates in the background.

“We recognise the strong intent of the new US administration to ‘grasp the baton’ taking stimulus into the fiscal arena as the Fed proceeds to gently normalize monetary policy settings both on the rate and balance sheet fronts.

“Such a policy combination of looser fiscal and gradually tighter monetary policy settings should provide further support for the inflationary process without undermining the UDS dollar and therefore sowing the seeds of its own downfall.

“In short, we believe the Australian idiom, or turn on of phrase, ‘She’ll be right’ is a good descriptor of our current view on the global inflation outlook,” Mr. Booth said.

Australian investors can access the highly rated Western Asset management fixed interest strategies that offer active management of fixed income portfolios, with a value-oriented investment approach that is supported by a team of fixed income specialists in every market sector. These include the Legg Mason Western Asset Global Bonds and Legg Mason Western Asset Macro Opportunities Global Bond Fund.

Read the full the paper.

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