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- A return to 1970s-style inflation is unlikely, Bridgewater co-CIO Bob Prince told the Financial Times.
- Back then, the American economy experienced "cost push" inflation, driven by rising costs for labor and commodities.
- Prince offered a note of caution, warning that continuous wage growth could lead to inflation.
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A return to 1970s-style inflation is unlikely given deeper deflationary impulses, said Bridgewater co-CIO Bob Prince in an interview with the Financial Times.
The head of the world's biggest hedge fund, founded by Ray Dalio, told the FT he expects future months will bring some "moderate" inflation, rather than the double-digit price hikes that pummeled America in the 1970s.
Back then, the American economy experienced "cost push" inflation, driven by rising costs for labor and commodities. Many economists point to loose Fed policy as well as external forces, including the 1973 Arab oil embargo and soaring global food prices, as having fueled an inflationary spiral.
Prince downplayed the likelihood of a return to such an inflation regime.
"If you go back to the 1970s . . . you didn't have the printing of money back then but you had credit growth. You had very strong collective bargaining, labor unions," he told the FT. "You had deregulation of the commodities markets . . . so you had a spike in commodities, spike in oil prices. You had a lot of things there that don't exist today."
Prince's remarks add to the raging debate over the Fed's view that any coming inflation will be transitory. Readings for the core personal consumption expenditures index, the Fed's preferred inflation gauge that excludes volatile food and energy prices, came in at 3.1% in April. That prompted the Fed to adopt a more hawkish stance on future rate increases.
Meanwhile, bond-market expectations of inflation are more sanguine. One common gauge of investors' expectations shows inflation averaging 2.25% over the next decade, roughly in line with the Fed's 2% target.
Prince offered a note of caution on inflation expectations, warning that continuous wage growth could presage a "self-reinforcing cycle" of inflation. That is, businesses could begin to preemptively increase prices in anticipation of wage hikes, should the expectation of ever higher wages become rooted in people's minds. The opposite would also hold: workers would demand sustained raises as they came to expect higher prices.
"We haven't crossed that point yet. It's still a reasonable possibility," Prince said.
The Fed has said that broad wage pressures have not yet materialized, and that wage growth at the bottom of the income spectrum - which has begun to show up in industries like hospitality - is ultimately a good outcome.