Asset management giant warns: Up to 4% inflation could become the new normal in the United States!

Despite significant easing of inflationary pressures in the United States over the past two years, the work to combat inflation is far from over—factors such as expensive artificial intelligence technology expenditures and nearshore outsourcing could be contributing to this situation.

This is the view of Anne Walsh, Chief Investment Officer of Guggenheim Partners Investment Management, who believes that the mid-term inflation rate in the United States could rise to as high as 4%. While the short-term inflation rate is expected to return to the Federal Reserve's target level of 2%, she does not expect this level to be sustained for long. She manages around $320 billion in assets.

Walsh stated at the Greenwich Economic Forum in Connecticut on Tuesday, "We are in a reflation world that we have not seen in some time," and when inflation returns to the Federal Reserve's 2% target, "I don't think they can stay at that level for too long."

In recent months, investors' focus has shifted from inflation to economic growth as price pressures have steadily declined from their peak in 2022. However, concerns about inflation reigniting were sparked by a strong nonfarm payroll report released last Friday following Federal Reserve officials announcing a 50-basis-point rate cut.

Walsh said, "I think we may be facing a wave of modest inflation." While she does not expect a situation like the 1970s (when Federal Reserve officials battled double-digit inflation), inflation will be a "natural component of the paradigm."

Policymakers expect the average inflation rate next year to be 2.1% and to reach the 2% target in 2026. Economists surveyed by Bloomberg expect the Personal Consumption Expenditures (PCE) inflation to average 2% in the first quarter of next year. The median forecast from Federal Reserve officials released last month indicates they expect the Personal Consumption Expenditures Price Index (CPI) to rise by only 2.3% in 2024.

Furthermore, regardless of whether Harris or Trump wins, Walsh expects the presidential election on November 5th to have a significant impact on the market. She said, "I think 2025 could be a challenging year, and we will definitely see that next year, whoever is elected president, their policies will have a huge impact."

To address the unknown circumstances, Walsh recommends investing in high-yield bonds and holding stocks of financially robust companies. She also likes investing in infrastructure and real estate but remains cautious on office buildings.

Walsh said, "I am always looking for the next potential risk and trying to pay attention to whether a black swan event might occur. It can be said that for most of my career, I have not seen so much conflicting information and rising risks."