AllianceBernstein Senior Economist, Eric Winograd, joined Yahoo Finance Live to break down why inflation may increase over the course of the year.

Video Transcript

ADAM SHAPIRO: Whenever we do these market checks, I always think of "Trading Places," pork bellies, Mortimer, pork bellies. But it's not pork bellies we're paying attention to. No, we're paying attention to the yield on the 10-year and what's going on with bonds, and how that's impacting how you decide what to do with your money. Let's bring in someone who understands all of that and will explain it to the rest of us.

Eric Winograd is AllianceBernstein Senior Economist. We appreciate your being here. And one of the issues, when we talk about fixed income, is we focus so much on that 10-year yield. As investors, are we making a mistake tying too much of our decision making to where that yield is going, whether it's up or down?

ERIC WINOGRAD: I think a lot of the time the answer to that is probably yes. But some of the time, the answer is no. And right now, I do think that the moves in the 10-year yield, or in bond markets more generally, but the 10-year is a good representation, do matter a lot. One of the fundamental underpinnings of strong equity performance the last six to nine months has been very low yields. And yields are not as low today as they were just a few weeks ago.

SEANA SMITH: So Eric, with that in mind then, where do you expect the 10-year to move going forward? We know it's obviously spooked investors. We saw that in the reaction that we got in the equity markets last week. So going forward, what are you expecting to see?

ERIC WINOGRAD: So we do think that there is room for yields to continue to move higher. I think the pace of the move will be slower. I don't think that we should expect the yield to move up 50 basis points every two months or anything like that. But we are looking for a 10-year yield that's somewhere between 150 and 2% by the end of this year and then moving to something between 2 and 2 and 1/2 next year.

Remember, when we think about how that yield move will play out, the bond market takes the staircase up, right. You get sharp moves up, and then a period where it moves sideways and consolidates, and then another sharp move higher. So I think we should expect that basic pattern to repeat a handful of additional times over the course of the next few quarters.

ADAM SHAPIRO: OK, so if we expect it to repeat, but we look at what just happened. We saw people selling bonds. But that cash wasn't going immediately into equities. What do people do with that cash? As an economist, do you track that? Are they just literally putting it into cash, waiting for a dip in equities?

ERIC WINOGRAD: I think in the short term people probably do very little with it. I think that a lot of the times money that has been in bond markets is there because investors don't really want to take a lot of risk with it. So I don't think you should expect it immediately to go into the equity market. And that's why those periods of consolidation are important.

Right, when yields move higher and then move sideways, during that sideways period, I think you should expect the equity markets to get over the indigestion, if you will, and to recover a little bit, as people put some of that money back to work. Inevitably though, some of it will stay on the sidelines. I think that there is some concern that equity markets may not be able to perform as well as we might like with higher yields.

And so I do think that it causes a little bit of investor caution, even if the rising yields is, honestly, for pretty good reasons from an economic perspective.

ADAM SHAPIRO: So I'm going to do a quick follow on that. Because what we witnessed last time wasn't an immediate rush into equities. But in a normal world, shouldn't-- if we see people selling bonds, shouldn't we see equities going higher?

ERIC WINOGRAD: It depends on the reason that bond yields are going up, right. If yields are going up because there is an expectation that inflation might move higher and that the Fed might tolerate it, then generally you would expect equities to do well. But if bonds are going up because real yields are going up, then that is a potential challenge to the equity market. You need to look at it from the perspective of what your alternatives are.

And, again, one of the stories underlying the strong performance of equities has been the idea that there is no alternative. That yields are just too low. And so, therefore, you need to be in equities. As yields march higher, that story gets a little bit harder to tell. And so, again, during those periods of consolidation in the bond market, we do think some of the flows will go back into equities. But over the long-term, rising yields are a challenge to some of the underpinnings of the equity market.

We think that that's offset, because the economic outlook is strong. And so we're not calling for a significant equity market correction. But I think that the idea that you're going to have equity markets only going higher, you know, that's a much easier story to tell when interest rates are stuck at very low levels than it is when they're moving higher.

SEANA SMITH: So Eric, we have this march higher in yields that you're talking about, of course, then that's also coupled with this talk of inflation. What are you anticipating we see throughout the course of the year in regards to that?

ERIC WINOGRAD: I do think inflation is likely to increase over the course of the year. Some of that is going to be transitory. We're going to see an increase in the year-on-year rates over the next few months because of what happened a year ago. But as we move into year end, I think it is likely that underlying inflationary pressures are going to rise. We are seeing signs that the demand side of the economy, the things that people want to do and to consume, that part of the economy is recovering very robustly.

Fiscal stimulus has been very effective at getting money into people's pockets. And when they have the opportunity, we expect that they will spend large parts of that. There's a lot of ammunition for households to spend a lot. I think the supply side of the economy will be a little bit slower to reopen. We have lost a lot of small businesses. And it will be a challenge for some businesses to reopen with restrictions still in place.

You know, it's wonderful here in New York that people can go to sporting events again but only 25% capacity, right. So you are going to have these constraints on the supply side. And Economics 101, when demand is greater than supply, you should expect inflation to go up. Or you should expect prices to rise. And that is what we expect as the year moves along.

I want to caution, though, that we're not expecting a disruptive inflation. I think people in markets are too quick to jump from where we are now straight to the 1970s and to say, oh no, inflation is coming. And it's a terrible thing. A little bit more inflation isn't cause for alarm over the medium term. In fact, it is something that central bankers all around the world would welcome and are likely to not only tolerate but even to encourage.

ADAM SHAPIRO: Little secret, Eric, nobody wants to go to a Mets game. Oh, I'm going to get some angry mail on that one. Thank you very much. Eric WInograd, he's AllianceBernstein's Senior Economist with fixed income. All the best--