Fairfax's Watsa Sees U.S. Inflation Climbing as Economy Expands

(Bloomberg) -- Prem Watsa said he expects U.S. inflation to rise.

“Inflation is very likely,” Watsa, chairman and chief executive officer of Fairfax Financial Holdings Ltd., said Friday on a conference call after releasing fourth-quarter results. “The economy could grow significantly in the next few years,” resulting in higher interest rates as the Federal Reserve retreats from its easing strategy, he said.

The Canadian investor on Friday reiterated his optimism about the U.S., saying that the tax overhaul and deregulation could help fuel economic growth. After U.S. President Donald Trump’s victory in 2016, Watsa said he planned to go on the offense when it come to markets after years of playing defense. The Toronto-based firm had $37 billion of portfolio investments as of Dec. 31.

U.S. consumer prices rose more than expected in January, raising concerns that a pickup in inflation could drive the Fed to boost rates faster than anticipated. The central bank has sought to get a preferred gauge of inflation to 2 percent -- a target it’s mostly missed in the past five years.

While Watsa see inflation building, he’s hanging onto to derivatives that protect against deflation in case there’s a stumble in China’s growth or hurdles in world trade. That bet led to $71 million of net unrealized losses on CPI-linked derivatives last year.

‘‘If some of the unexpected risks come to pass, these CPI-linked derivatives could become very valuable,” Watsa, 67, said on the call. “We will hold them for some time.”

To contact the reporter on this story: Katherine Chiglinsky in New York at kchiglinsky@bloomberg.net.

To contact the editors responsible for this story: Michael J. Moore at mmoore55@bloomberg.net, Steven Crabill, Jacqueline Thorpe

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