High inflation has been a worry for markets. While some economists believe that inflation has peaked and would come down sharply next year, some others see structurally high inflation sticking for a while.
The CPI inflation increased at an annualized pace of 7.7% in October, which was below the 7.9% that economists were expecting. It was the first time since February that annualized inflation fell below 8%.
Also, the wholesale inflation as measured by the PPI (producer price index) rose 8% annualized in October, which was below what economists were expecting. The lower-than-expected inflation reading raised hopes that the Fed might soon take a dovish approach.
Wharton professor Jeremy Siegel has said that the Fed would pause its rate hikes after a 50-basis point rate hike in December. He also said that markets would not retest their 2022 lows and can deliver 30% returns over the next two years. There is a guide on how to buy stocks with a regulated broker.
Mike Wilson of Morgan Stanley also believes that US inflation is set to slide and has predicted that it would fall to 2-3% by the end of 2023. Incidentally, the Fed targets average inflation of 2%.
Are We Headed for Deflation? Cathie Wood Believes So
There is a section of the market that believes that we’re headed for deflation. Cathie Wood of ARK Invest, who has criticized the Fed for its rate hikes believes that instead of worrying about inflation, we should be thinking about deflation.
Tesla’s CEO Elon Musk and bond guru Jeffrey Gundlach endorsed Wood’s views of impending deflation. Gundlach also believes that bonds are an attractive investment option amid the current macro environment. There is a list of deflationary cryptocurrency tokens.
The US Fed has been on a rate hiking spree and has raised rates by a total of 3.75% this year. After the November FOMC meeting, Powell cautioned, “We still have some ways to go and incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected.”
Fed Has Been Raising Rates to Tame Inflation
He added, “The question of when to moderate the pace of increases is now much less important than the question of how high to raise rates and how long to keep monetary policy restrictive.” The Fed is willing to sacrifice some growth in order to tame inflation.
US stocks had fallen after the Fed’s November meeting. This week, we’ll get the minutes of the Fed’s November meeting. Markets would look out for the report to gauge the hawkishness of the US central bank amid a slowing US economy.
Fed minutes have led to a market sell-off over the last couple of months. Powell has dashed hopes of a pivot multiple times and has warned of premature easing. In the Fed minutes, markets would look for signs of how far the Fed is looking to raise rates to tame inflation.
For now, economists expect Fed to raise rates by another 50 basis points in December and another 50 basis points in February 2022.
Bill Ackman Believes Fed Cannot Fight Inflation
While many economists believe that inflation would drop considerably next year, Bill Ackman of Pershing Square Holdings has a contrarian view. On an investors call, he said, “A part of our thesis here is that we think inflation is going to be structurally higher going forward than it has been historically.”
He added, “We do not believe that it is likely the Federal Reserve is going to be able to get inflation back to a kind of consistent 2% level.”
Higher inflation has taken a toll on US stocks, especially the growth names. However, there is a list of investments that can do well in inflation.
All said, there are signs that inflation should gradually come down next year. Commodity prices have come down while a slowing economy is also taking a toll on housing prices as well as prices of several discretionary goods. Also, as layoffs mount, wage growth should also subside which would help in taming inflation.
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