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Scottish Fund Manager: Big Wave of Inflation to Hit US

Tuesday, 22 February 2011 08:41 AM

Inflation in the U.S. may accelerate more quickly and spook some investors as Federal Reserve Chairman Ben Bernanke stokes the economy, according to Edinburgh’s largest manager of money for outside clients.

“If Bernanke wants inflation he’s going to get it,” Gerald Smith, 48, who helps oversee 72 billion pounds ($117 billion) as deputy chief investment officer of Baillie Gifford & Co., said in an interview at his Edinburgh office. “I have personally been surprised that U.S. inflation hasn’t picked up already, but that’s a matter of time.”

The Fed injected $600 billion into the U.S. economy on Nov. 3 with a program of buying Treasurys in a second round of so-called quantitative easing. It initially spent $1.7 trillion after the financial crisis to end the recession.

Consumer prices rose by more than economists had forecast in January for a second consecutive month led by the cost of buying food and fuel, according to a government report on Feb. 17. The year-on-year inflation rate rose to 1.6 percent from 1.5 percent the previous month and 1.1 percent in November.

Expectations of inflation are rising in the U.S. as measured by the five-year breakeven rate, which is derived from the yield difference between regular and inflation-linked Treasurys. The rate rose 4 basis points today to 2.10 percentage points compared with 1.13 percent on Aug. 24. The last time it closed that high was in August 2008, the month before the collapse of Lehman Brothers Holdings Inc.

Managing Dollars

Baillie Gifford, which was founded in 1908, manages assets for seven of the world’s largest 15 pension funds, including the California Public Employees’ Retirement System, the largest U.S. retirement plan, according to its website. Other clients include Vanguard Group Inc., the world’s largest mutual fund company.

Smith uses the Billion Prices Project, which tracks the daily prices of online goods in several countries around the world, as one indicator of future price movements.

Founded by Professors Roberto Rigobon and Alberto Cavallo at Massachusetts Institute of Technology’s Sloan School of Management, the index shows U.S. prices rising at their fastest rate since at least July 2008.

“That is actually starting to show some upward signs in inflation so I think U.S. inflation will surprise on the upside,” Smith said. “Now maybe it’s going to lag behind other markets, but certainly the trend is going to be upwards.”

Lagging Rate

The U.S. consumer price index in January was the fifth- lowest among 78 countries according to data collated by Bloomberg. In the U.K., the main rate of inflation jumped to an annual 4 percent last month and it’s above that level in countries such as China and South Korea.

One reason why U.S. inflation is lagging is because the “massive expansion” of the monetary base was offset by borrowers repaying debt, said Smith, who takes over as chief investment officer in April.

The Bank of England is acting as if it has the same dual mandate as the Fed to encourage growth as well as curbing price rises, Smith said. It has kept interest rates at a record low of 0.5 percent since March 2009.

“They don’t have a mandate for growth,” Smith said. “If they were just acting on the inflationary outlook I think they would be raising interest rates. Their inflation forecast has been absolutely horrendous, that is a statement of fact.”

Smith, who has philosophy degrees from St. Andrews University and Oxford University, joined Baillie Gifford in 1987. He was head of emerging-market stocks from 1997 to 2008 when he became deputy chief investment officer. He still manages Monks Investment Trust Plc, a 919 million-pound closed-end fund.

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Inflation in the U.S. may accelerate more quickly and spook some investors as Federal Reserve Chairman Ben Bernanke stokes the economy, according to Edinburgh s largest manager of money for outside clients. If Bernanke wants inflation he s going to get it, Gerald Smith,...
Tuesday, 22 February 2011 08:41 AM
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