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Goldman: Beware of higher inflation next year

Treasury bonds traders
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Investors are looking for the next big contrarian trade after the widely expected first Fed rate hike in nearly a decade on Wednesday. A prominent Wall Street strategist believes she found it.

Goldman Sach senior rates strategist Silvia Ardagna told clients last week the market is mispricing the potential of rising inflation:

"As unemployment continues to fall and excess slack gets absorbed, we expect that US core and services inflation, which are already contributing about 2 percent to headline inflation, will continue to accelerate gradually but faster than the market expects."

Ardagna noted how the futures market is pricing inflation to average 1.25 percent over the next five years, which she says is too low as stronger wage growth and easier energy price comparables will make 2016 more reflationary.

Here are the ramifications of higher inflation and how she recommends trading it.


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