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Economy can handle a sharp rise in inflation, market bull Ed Yardeni predicts

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Ed Yardeni: 'People are just going to keep spending'

The post-lockdown spending frenzy may contribute to a sharp rise in inflation, but Ed Yardeni believes the economy can handle it.

Yardeni, who spent decades on Wall Street running investment strategy for major firms including Prudential and Deutsche Bank, sees inflationary pressures as a temporary byproduct tied to massive reopenings and historic liquidity.

"People are just going to keep spending," the Yardeni Research president told CNBC's "Trading Nation" on Friday. "A lot of pent-up demand is getting satisfied here both in goods and services."

Wall Street got further confirmation last week of strong inflation growth through the core personal consumption expenditures, a key gauge closely followed by the Federal Reserve. It rose a faster-than-expected 3.1% in April from a year earlier.

"When the lockdown restrictions were gradually lifted, we did see this tremendous surge in shopping, and shopping does release dopamine in the brain," said Yardeni. "A lot of people just ran out and started doing shopping."

First it was goods, and now it's services, according to Yardeni.

"A lot of services were really eliminated in terms of what was open," he noted. "Clearly, we're seeing the services opening up."

Yardeni expects upward pressure on inflation to last at least a few months.

"The economy has a V-shaped recovery, and actually we're back to where real GDP was right before the pandemic," he said. "I would expect to see some slowing down in the economy later this year going into next year."

He anticipates demand will eventually wear off even in the housing market where prices are booming.

"I can't imagine that the kind of growth rates that we've been seeing over the past few quarters are sustainable," said Yardeni.

But when it comes to rents, Yardeni sees landlords getting more pricing power. He finds the rental market is tightening up pretty quickly right now.

"We've kind of run out of an inventory of houses. All these people were hoping to buy something affordable and finding that prices are up 20% from a year ago, and there's slim pickings," he added. I'm concerned a lot of would-be homebuyers are just saying 'You know what, no mas. I give up. Let's just stay.'"

What's next for Treasury yields

Yardeni, a long-time stock market bull, believes the benchmark 10-year Treasury Note yield will remain rather benign despite surging prices.

"It's been remarkably stable in the past few months... in the face of higher than expected inflation news and lots of very strong economic indicators," he said. "I do think we're going to see 2% on the bond yield."

It's not a level that should spook Wall Street, according to Yardeni. However, he predicts Federal Reserve policymakers will start talking about tapering earlier than investors think. As a result, he sees the 10-year yield ending 2022 around 2.5% to 3%.

"Not exactly the end of the world because that's where bond yields were before the pandemic," Yardeni said. "That would actually be going back to normal."

The 10-year yield ended the week at 1.58%, down almost 6% over the past two months.

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'Dopamine' demand shock driving inflation is temporary: market bull Ed Yardeni