PIMCO, Buffett, and Faber Say Inflation on the Way, Invest in TIPS and Commodities

Pacific Management Investment Co. (PIMCO),  as well as investors Warren Buffet and Marc Faber say that inflation is coming.  Increased inflation doesn't bode well for savers and Treasury holders.

In a March 2009 PIMCO investment report entitled The Time Is Right for Real Return Investing, Chris Caltagirone and Bob Greer write that:

"In the near term, our outlook is for low to no year-over-year headline inflation. We expect several months or quarters of negative consumer price index readings due to excess capacity and production and lower employment levels. Lack of both cost and demand inflationary pressures, combined with below-potential growth, should keep inflation subdued.

However, PIMCO believes that the policies of the Federal Reserve and the Obama administration, which are designed to avoid deflation, are likely to reflate the economy over the next three to five years. Breakeven inflation rates currently reflect expectations of nearly 3% deflation over the next five years. This is not PIMCO’s outlook...Although we expect growth to contract in 2009, government stimulus may reflate the economy as soon as 2010 and beyond that."

Warren Buffet touched on many of the same themes in an interview with CNBC.  He says:

"I think inflation is really picking up, so I think the Fed has to be very careful to do anything that signals that they consider inflation to be a secondary goal and something that they'll worry about later.  Because it's huge right now.  I mean, whether it's steel or it's oil, you name it.  The pressure, you've seen it in chemical prices recently.  Dow has announced.  We see it everyplace.  It's exploding."

On March 9, Marc Faber, pubisher of the Gloom, Boom and Doom Report, said on March 9 on Bloomberg Television that the U.S. is laying the foundation for an increase in prices.

“The massive money printing we have and the massive deficits we have now will make it difficult when there are some price pressures for the Federal Reserve to actually increase interest rates."


PIMCO believes that with inflation on the horizon, US Government issued Treasury Inflation Protected Securities (TIPS) and commodities offer good protection.  TIPS are government backed and the principal is adjusted based on the inflation rate as measured by the Consumer Price Index.

At the moment, 10 year TIPS are yielding 1.91% versus 10 year Treasury yields of 2.86%.  The advantage of TIPS though is that if/when inflation increases, the TIPS yield will increase while the Treasury yield will remain the same.


Both PIMCO and Buffett seem to feel that commodity prices are headed higher.  PIMCO writes:

"Despite the dire scenario in the global economy and markets, the credit crisis and the decline in commodity prices may actually be sowing the seeds of future commodity price appreciation. Due to lower prices and tight credit, commodities producers are delaying projects for capacity expansion, which could constrain future supply when global growth resumes. For example, farmers are likely to cut their plantings because of falling prices for crops and lack of financing to buy fertilizers. The result: reduced supply and the potential for higher prices if demand increases."

Sam Cass
Sam Cass: Sam Cass, MBA, JD, University of Texas at Austin. Always a fan of Leonardo Da Vinci.

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