Higher Inflation And Interest Rates Could Be On The Horizon, Economist Says

DALLAS -- The next economic cycle is likely to be accompanied by higher interest rates and higher inflation, a leading economist said today.

Speaking at the National Association of Independent Life Brokerage Agencies annual meeting, Bob Baur said a recession is inevitable, possibly in 2021 or 2022. Baur is the chief global economist for Principal Global Investors.

"We need to remember that this is the longest expansion in U.S. history and we need to keep in mind that, at some point, it's going to come to an end," Baur said. "I think we're in a transition period and people are looking for what the next cycle will be."

Recent economic forecasts call for the U.S. economy to expand for a 12th consecutive year in 2020, but by an anemic 2%, tapering off at the end of the year. On the plus side, income stagnation appears to be coming to an end, Baur said.

Year-over-year hourly earnings were up a healthy 3% to 3.4% this year.

"I think that long cycle over the last 25 years or so of income stagnation may be beginning to end," he said. "I think middle-class wages could be the next bull market."

The recent stock market upsurge is due mainly to the Federal Reserve cutting interest rates, Baur added, and should not be trusted as a long-term indicator.

"I think this rally is unsustainable because interest rates can't go much lower," he said, adding that the next economic expansion depends largely on who is the next Steve Jobs or Jeff Bezos. "I think what we're looking for now is some kind of transition to new leadership, but we don't know what that new leadership will be."

Beyond that, three trends are likely to fuel a rise in inflation and interest rates, Baur explained:

1. A final burst from the current economic expansion.
2. Economic slack in the world economy.
3. Globalization.

On the final point, Baur noted the rise in wages in countries like China. Once giant corporate producers are unable to outsource to cheap employment, inflation will rise, he predicted.

"For stock market investors, I think there's probably still more upside" in the short term, Baur concluded.

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.

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