Mihir Worah, PIMCO portfolio manager, is discussing inflation and TIPS in a new economic outlook titled, ‘Higher Commodity Prices and the End of Economic Growth Without Inflation‘.

Worah is manager of the $19.8 billion Pimco Real Return Fund (PRRIX),  which has about 78% of its investment in Treasury Inflation-Protected Securities.

Here are some excerpts:

Commodity prices are rising. Given the global supply/demand imbalances that we see, we expect commodity prices to be generally rising going forward, noting, of course, that commodity prices are volatile and that there will be differentiation among commodities. Much of this is related to the dynamics in and between developed and emerging economies. …

Inflationary pressure from commodities will be even higher within emerging markets. The reason: commodities are such a large part of their consumption basket – for example, nearly 60% in India, compared to about 25% in the U.S. …

Currency issues. Currencies may become another strong driver of inflation, especially among developed economies. We anticipate policymakers in the developed world will attempt to make their economies more competitive via a cheaper currency, which likely will, for net importers like the U.S., lead to higher inflation. …

Finally, in our view, the biggest implication for the global economy of these dynamics is that the goldilocks days of the ’90s where nations could have strong growth and low inflation simultaneously are gone.

Worah goes on to endorse Treasury Inflation-Protected Securities as a hedge against rising inflation. (Remember, however, that he manages a fund that specializes in TIPS, so he has an interest in promoting them.)

To be sure, there is currently a valuation issue with inflation-linked bonds as real rates on such bonds are low. But we believe those rates are likely to stay low – one way for developed markets to escape from their debt overhang is by artificially keeping real rates low, either through regulation or through higher inflation via inflationary/low-rate policies. So in our view, inflation-linked bonds have the potential to hold their value while serving as a cornerstone of an inflation-hedging strategy. …

Investors should seek out prudently managed active strategies that provide the benefits of inflation-linked bonds while attempting to enhance the offered yields.