In the meeting rooms of Fortune 500 companies, in the posh bars of Wall Street, and in the halls of business schools across the country, there has been a constant debate about “what’s next?” for U.S. inflation over the past year.
In recent months, a growing chorus of economists and business leaders have argued that the scourge of skyrocketing consumer prices is coming to an end. But a separate group of similarly savvy economic minds believe that history shows that inflation will not be so easily tamed.
The arguments made by Wharton professor Jeremy Siegel and billionaire hedge fund manager Bill Ackman this past week exemplify these opposing ideas.
Siegel said Monday that he believes the Fed’s six rate hikes this year have already reduced inflation, and the data just don’t show it yet.
“I think basically 90% of our inflation is gone,” he told CNBC, pointing to the slowing housing market as evidence.
But Bill Ackman, the founder and chief executive of Pershing Square Capital, said last week that he believes inflation is far from under control.
“We think inflation will be structurally higher going forward than it has been historically,” he said on a call with investors on Nov. 17, arguing that trends such as deglobalization and the transition to clean energy will lead to sustained cost increases.
Ackman and Siegel are two heavyweights in the high-inflation debate, and who’s right could determine everything from the value of your 401(k) to how much you pay on your mortgage. Here’s a look at their arguments.
Ackman structural inflation and capital risk
Inflation, as measured by the Consumer Price Index (CPI), rose 7.7% from a year earlier in October. While that’s well below the peak of 9.1% seen in June, it’s a long way from the Fed’s target rate of 2%.
Many bullish economists and business leaders say that even after aggressively raising interest rates this year, the Federal Reserve has a lot of work to do to really get inflation under control. And Bill Ackman believes they may not reach 2% at all.
“We don’t believe it’s likely that the Federal Reserve will be able to get inflation back to some kind of sustained level of 2 percent,” he told investors last week.
The hedge funder explained that there are long-term structural changes in the global economy such as rising wages, the transition to clean energy and deglobalization that will increase company costs and keep inflation high in the coming years.
In particular, Ackman argued that on-shoring — moving previously foreign business operations back to the U.S. — could raise labor and material costs for U.S. companies and increase inflation.
“Ultimately, we will have to accept a higher level of inflation that is associated with deglobalization,” he said. “We strongly believe that a lot more business will come closer to home and it’s more expensive to do business here.”
Because of these long-term structural changes that will exacerbate inflation, Ackman believes the Fed will have to stick to its guns by raising interest rates. But he explained that these rising rates will only serve to push up long-term bond yields, which is a “risk for stocks.”
Siegel’s shelter deflation and a surge in stocks
Siegel and more conservative economists like him argue that the worst of inflation is over.
They point to the fact that house prices make up roughly a third of the CPI, one of the most common gauges of inflation, and note that the housing market is already slowing.
There are now 28 once-red-hot housing markets where home prices are down 5% or more from a year ago and mortgage applications are down 41% over the same period.
Siegel says the Fed ignored the ailing housing market because they were looking at outdated CPI data, which measures changes in home prices with a lag.
“I mean housing is down, but the way the government calculates it is so backwards that it will continue to show increases,” he explained.
The Wharton professor argued that new data in the coming months, including the Case-Shiller home price index, will begin to properly illustrate the deflation coming from the housing market, prompting the Fed to hold off on raising interest rates.
“It took the Fed too long to figure it out and they still haven’t figured out that inflation is basically over, but they will and I think they’ll figure it out probably very late this year or early next year,” he said. . “And I think as soon as they get it, you’re going to see a big increase in stock prices.”
Siegel believes that when the Fed realizes that inflation is disappearing and decides to stop raising interest rates or even cut them, it will cause the S&P 500 to rise 15% to 20%.
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