Chance of Deflationary Spiral Small

Mihir Worah is the manager of the Pimco Global Real Return fund.

QAre consumer prices headed lower?

AConsumer-price inflation has peaked for the time being. The high point was 5.5 percent in July. A year from today, we'll probably see consumer-price inflation at 2 percent or below. Going from 5.5 percent to 2 percent, that's a perfect world.

What could go wrong?

There is the small chance that consumer-price deflation could spiral out of control. If everything that I buy tomorrow will be cheaper than what I buy today, why should I spend today? If that happened, we'd see the price of goods get lower and lower every year. Everything the Federal Reserve, Congress and the Treasury have done is to arrest this downward spiral.

And longer-term?

In the long run, as the economy recovers, we could see higher prices. But that's at least a year or two away. All that's been done so far to stabilize the system will build up inflationary pressures in the long term. And commodity prices are in an upward spiral. There are 2 billion people in Asia looking for a better standard of living, and that's not a one-year event -- it's a generational event. Asian economies that had been keeping prices in check in the United States with cheap imports will now be exporting inflation, through higher commodity prices and appreciating currencies, and by passing on the cost of higher wages.

What's your forecast?

In the next three to five years, inflation will rise, but it won't spike and it won't go into double digits. We'll see 3 percent to 4 percent inflation. Steady-state 2 percent inflation -- that's something from the '90s.