Jason Stipp: I'm Jason Stipp for Morningstar. As part of Morningstar's Inflation Report, we're checking in with JPMorgan's Deepa Majmudar. She is an executive director and a portfolio manager on the Inflation-Managed Bond and the Tax Aware Real Return Fund.
Deepa, thanks so much for calling in today.
Deepa Majmudar: Thank you, Jason.
Stipp: I want to start big, ask you a big a picture question about inflation. We've seen some countervailing forces with inflation. We saw some prices spike earlier this year, but yet we also see high unemployment continue in the U.S., which would tend to keep a lid on inflation. What's your outlook for inflation? What are you expecting giving that we're seeing some countervailing forces here?
Majmudar: As you said, there are opposing forces and what we've seen is that inflation has recently run up quite a bit, but that has been primarily driven by a rapid increase in commodity prices, such as energy, food, basic metals, and some of that also has come from increasing import prices. So, the major catalysts for inflation recently have been weaker dollar and also a series of geopolitical events around the world causing supply disruption.
CPI as measured by Consumer Price Index, including food and energy has run up to 3.6%. That's almost tripled since last year. Now, with a recent decline in oil prices, we expect that pressure to ease a little bit, but we also have to remember that oil is a very volatile commodity and can have any sort of spike and increase in price at any time.
If you compare actual CPI to what the market is pricing in as inflation risk premium, and we see that as TIPS breakevens, inflation expectations in the TIPS markets, that's quite a bit low compared to actual inflation right now. So, if you look at two-year inflation breakevens, they are just over 1.5%. So, I think there is value to be found in TIPS market at shorter maturities.
And longer-term inflation is always a risk to markets, especially now considering money supply and also strong growth in emerging markets that can put further pressure on commodities, wages, and longer-term inflation risk premium in the market. The inflation breakeven is still quite a bit below 3%. It's more around 2.5%, and that's lower than the inflation that we've experienced historically over last the 40-50 years. So, I think one can pick and choose and find value in inflation market.
Stay tuned: Part 2 and 3 of our interview with Deepa Majmudar will be released on July 21 and 22.