Gundlach – Inflation Will be Above 4%, Making Treasury Bonds Overvalued

Inflation will stay above 4% for 2022, according to Jeffrey Gundlach, which makes Treasury bonds at yields of 1.5% to 2% overvalued.

The Fed thought inflation would last only a few months, but Gundlach thinks it will be longer-lasting.

The CPI may stay elevated as the effects of increased housing prices (which show up as owner-occupied rent in the CPI) will seep through into next year. But inflation in the prices of cars, lumber, and other goods affected by supply-chain issues may go away, he said.

But labor and housing inflation will stay.

Gundlach acknowledged that he failed to predict the recently announced 6.2% CPI inflation. But he now thinks there is a chance of hitting 7% at some point in the next year.

The Fed will fight inflation, but we will see economic problems with just a few rates hikes. That could “break the economy,” Gundlach said. The bond market is sniffing out a weaker economy with problems sooner rather than later.

He said the economy will weaken in the second half of 2022.