The post-lockdown spending craze could contribute to a sharp spike in inflation, but Ed Yardeni believes the economy can handle it.
Yardeni, who for decades led Wall Street investment strategy for big companies like Prudential and Deutsche Bank, sees inflationary pressures as a passing by-product tied to massive reopenings and historical liquidity.
“People will just keep spending,” the president of Yardeni Research told CNBC’s “Trading Nation” on Friday. “There is a lot of catching up to do here, both in terms of goods and services.”
Wall Street received further confirmation of strong inflationary growth last week from core consumer spending, a key indicator closely followed by the Federal Reserve. It rose faster than expected in April by 3.1% compared to the previous year.
“When the lockdown restrictions were gradually lifted, we saw this huge surge in shopping, and dopamine is released in the brain while shopping,” said Yardeni. “A lot of people just walked out and started shopping.”
First it was goods, now it is services, says Yardeni.
“A lot of services were really eliminated in terms of what was open,” he noted. “We can clearly see that the services are opening up.”
Yardeni expects upward pressure on inflation to persist for at least a few months.
“The economy has seen a V-shaped recovery and, in fact, we are back to where real GDP was right before the pandemic,” he said. “I would expect the economy to slow down a bit later this year and into next year.”
He assumes that demand, even in the real estate market, where prices are booming, will eventually decline.
“I can’t imagine the growth rates we’ve seen over the past few quarters to be sustainable,” said Yardeni.
But when it comes to rents, Yardeni sees landlords getting more pricing power. He thinks the rental market is tightening pretty quickly at the moment.
“We kind of ran out of houses. All of these people were hoping to find something affordable to buy and found that prices were up 20% year over year and that there was little choice, ”he added. I worry that a lot of potential homebuyers just say, ‘You know what, no mas. I’m giving up. Let’s just stay. ‘”
What’s Next for Treasury Yields?
Yardeni, a longtime bull on the stock market, believes benchmark yields on 10-year government bonds will remain on the cheap despite rising prices.
“It has been remarkably stable over the past few months … given unexpectedly high inflation news and many very strong economic indicators,” he said. “I think we’ll see 2% of the bond yields.”
According to Yardeni, this is not a level that should scare Wall Street. However, he predicts that Federal Reserve politicians will start talking about tapering sooner than investors think. As a result, he sees the 10-year return through 2022 at 2.5% to 3%.
“Not exactly the end of the world because that’s where bond yields were before the pandemic,” Yardeni said. “That would actually normalize again.”
The 10-year yield ended the week at 1.58%, down nearly 6% over the past two months.