Top investment strategist David Roche says inflation is here to stay. Here’s why

Published Thu, Jun 10 20213:06 AM EDTUpdated Thu, Jun 10 20213:24 AM EDT

Higher inflation is here to stay, according to veteran investment strategist David Roche, who described the view that higher prices were temporary as "most unlikely." Speaking to CNBC Pro Talks on Wednesday, Roche — who correctly forecast the demise of the Soviet bloc, the fall of the Berlin Wall and the global financial crisis of 2008 — disagreed with those economists who believe the current spike in inflation is transient. It comes as markets eagerly await Thursday's U.S. consumer price index for May to assess the extent and longevity of the inflation surge, and the likelihood that the U.S. Federal Reserve will have to begin conversations about tapering down its monetary stimulus program. Here's why Roche, president and global strategist at Independent Strategy, thinks higher inflation is a longer-term phenomenon. One of the key reasons Roche believes higher prices are here to stay is the enormous amount of global fiscal spending. "First of all the amount of stimulus being injected into the U.S. economy is of the order of nearly 75% of GDP (gross domestic product) since the beginning of last year and Mr. Biden — who is a thoroughly honest, nice man but may go down in history as somebody who didn't know how to do arithmetic — Mr. Biden is injecting another 10-15% into this economy," Roche said. "These are huge figures in an economy which is mature and has an underlying productivity growth rate of around 1.5 to 2%, but it is going to be growing for most of this year at 6% and most of next year at 4%, so that will generate inflation because demand will grow faster than the supply side." Economists are expecting Thursday's CPI to rise 4.7% from a year earlier, according to Dow Jones. In April, the CPI increased 4.2% on an annual basis, the fastest rise since 2008. Meanwhile, the U.S. Commerce Department reported that the core personal consumption expenditures index, a key inflation gauge, notched 3.1% in April, far outstripping the Fed's 2% target as price pressures built in the rapidly expanding U.S. economy. Roche expects the core PCE to still be running between 3% and 4% this time next year. In contrast, 21 of 30 strategists recently polled by CNBC said the inflation overshoot would be transitory. Reversal of globalization Roche also suggested that inflation will continue to be generated by the ongoing reversal of globalization, as governments adopt a more nationalist and protectionist approach to international trade, changing the macroeconomic landscape. "The fact that countries like China and Russia brought their labor forces into the free world economy depressed prices for manufactured goods for many, many years — decades in fact — and that is reversing, because countries are returning to a nationalistic and a national-based economic design," he told CNBC's Tanveer Gill. He added that coupled with government spending underpinned by accommodative monetary policy from central banks, these factors "are almost sure to produce inflation rates which even at the present time are running at 3 or 4% right now, so you have to say that's going to go away, and I think that's most unlikely." Fed 'behind the curve' Following strong labor market and economic activity data, recent comments by Fed officials have indicated that the central bank may soon begin discussions over tapering off its unprecedented $120 billion of monthly asset purchases. Roche concurred that the Fed would have to begin these talks in the second half of the year, suggesting that policymakers are "behind the curve" and will have to tighten policy sooner than previously anticipated. However, he suggested that interest rates will remain low for the foreseeable future due to central banks "holding down rates using every instrument in their toolbox." "The second reason is because central banks are directly financing governments, and the size of government deficits and debts is, as a percentage of GDP, so great that the only thing that makes this sustainable is if the central bank buys the bonds at the yield curve and keeps the interest rates lower than they would be in any free market environment," Roche said. "This is not going to change because if it does change, then the debt burdens and deficit burdens of governments become quickly unsustainable."

Gas prices are seen after U.S. consumer prices surged in April, with a measure of underlying inflation blowing past the Federal Reserve's 2% target, in Beverly Hills, California, June 2, 2021.

Lucy Nicholson | Reuters

Higher inflation is here to stay, according to veteran investment strategist David Roche, who described the view that higher prices were temporary as "most unlikely."

Speaking to CNBC Pro Talks on Wednesday, Roche — who correctly forecast the demise of the Soviet bloc, the fall of the Berlin Wall and the global financial crisis of 2008 — disagreed with those economists who believe the current spike in inflation is transient.

It comes as markets eagerly await Thursday's U.S. consumer price index for May to assess the extent and longevity of the inflation surge, and the likelihood that the U.S. Federal Reserve will have to begin conversations about tapering down its monetary stimulus program.

Here's why Roche, president and global strategist at Independent Strategy, thinks higher inflation is a longer-term phenomenon.