Market bull Jim Paulsen downplays inflation fears, sees rising prices contributing to an economic boom

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A long-term bull believes inflation shouldn’t scare investors.

According to Jim Paulsen of the Leuthold Group, rising prices should boost the market and economy.

“If we just end up elevating the rate of inflation a little bit on a permanent basis, I think that might actually do a lot of good,” the firm’s chief investment strategist told CNBC’s “Trading Nation” on Monday. “We’ve been fighting inflation for four decades in this country — always being quick to tighten, slow to ease. And the result is we’ve created some of the most sluggish growth over the last 15 years we’ve had in the entire postwar history.”

Paulsen contends higher inflation encourages more aggressive behaviors by both businesses and consumers with profitable results.

“It stokes animal spirits,” he said. “If people think prices are going to go up over time, that means you might feel better about getting higher wage hikes, for example. And, it might cause businesses to expand more operations because they know they can grow into it with pricing flexibility.”

He’s also not worried about the long-term impact of the supply chain turmoil. Paulsen attributes the backlog to a temporary shock caused by the Covid-19 lockdowns.

“When you get companies preparing for a depressionary bust and instead give them a postwar boom, they just can’t catch up,” said Paulsen. “They contracted operations to the minimums to survive a pandemic.”

Paulsen, who predicted on “Trading Nation” in August 2020 that the economic collapse would spark a massive comeback, expects the supply chain upheaval to moderate next year and leave a parting gift.

“I still think we might be left with a persistently higher average rate of inflation,” he said.

His base case calls for 3% to 3.25% inflation becoming the norm, and he suggests it’s a sweet spot for the economy. Over the past two decades years, it has hovered around 2%.

“There are some good things from a little higher inflation. Not runaway, but from a little higher inflation,” Paulsen said. “Maybe we’re headed to that environment. And if we are, maybe we’re going to get a little better economic outcome.”

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