But the prospect of deflation looms if efforts to stem the financial crisis fail. By Anne Kates Smith, Executive Editor November 30, 2008 Mihir Worah is the manager of the Pimco Global Real Return fund. Will the government's rescue plan to stabilize financial markets bring on higher inflation? No. The whole meltdown was deflationary. We saw it in the most dangerous fashion, in asset prices -- stocks, bonds and homes. That's going to hurt a person more than if gas prices are up 5%, which is what people were getting in a tizzy about. The only thing hanging in there was commodity prices, and now they've corrected. Now we'll see that disinflationary impact on consumer prices as well. What policymakers have done so far is truncate deflation. Is that the same as creating inflation? I don't think so. Consumer prices are headed lower? Consumer-price inflation has peaked for the time being. The high point was 5.5% in July. A year from today, we'll probably see consumer-price inflation at 2% or below. Going from 5.5% to 2%, 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. Advertisement 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 two 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 U.S. 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% to 4% inflation. Steady-state 2% inflation -- that's something from the '90s.