In recent months, a growing chorus of economists and business leaders have argued that the scourge of soaring consumer prices is about to end. But a separate group of equally seasoned economic minds believe that history shows that inflation won’t be tamed so easily.
Arguments made by Wharton professor Jeremy Siegel and billionaire hedge fund manager Bill Ackman over the past week exemplify these opposing ideas.
Siegel said on Monday that he believes the Fed’s six interest rate hikes this year have already killed inflation, and the data doesn’t show it yet.
“I think basically 90% of our inflation is gone,” he told CNBC, pointing to the slowdown in the housing market as evidence.
But Bill Ackman, founder and CEO of Pershing Square Capital, said just 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 in a Nov. 17 earnings call with investors, arguing that trends like deglobalization and the clean energy transition will lead to sustained cost increase.
Ackman and Siegel are two heavyweights in the high-stakes 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.
Structural inflation and Ackman’s equity risk
Inflation, as measured by the consumer price index (CPI), rose 7.7% from a year ago in October. While it’s well below the 9.1% peak seen in June, it’s a far cry from the Fed’s 2% rate target.
Many hard-line economists and businessmen argue that even after aggressively raising interest rates this year, the Fed has a lot of work to do to truly get inflation under control. And Bill Ackman believes they may not be able to hit 2% at all.
“We don’t think it’s likely that the Federal Reserve will be able to bring inflation back to a steady 2% level,” he told investors last week.
The hedge funder went on to explain that there are long-term structural changes in the global economy such as rising wages, the clean energy transition, and deglobalization that will drive up corporate costs and keep inflation high for the next few years. years.
In particular, Ackman argued that on-shoring — the moving of previously foreign business operations to the United States — could raise labor and material costs for U.S. companies and drive up inflation.
“Eventually we will have to accept a higher level of inflation that has to do with deglobalization,” he said. “We strongly believe in the argument 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 with interest rate hikes. But he explained that these rising rates will only serve to push higher long-term interest rates on bonds, which is “a risk to stocks.”
Siegel’s refuge deflation and rising inventories
Siegel and other dovish economists like him argue that the worst of inflation is already over.
They point to the fact that house prices make up about a third of the CPI, one of the most common measures of inflation, and note that the housing market is already slowing.
There are now 28 once-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 has ignored the struggling housing market because it is looking at outdated CPI data, which measures changes in home prices with a lag.
“My point is that housing has gone down, but the way the government calculates it is so lagged that it will continue to show increases,” he explained.
The Wharton professor says new data in the coming months, including the Case-Shiller home price index, will begin to adequately illustrate the deflation coming from the housing market, leading the Fed to halt rate hikes.
“It’s taken too long for the Fed to figure this out and they haven’t figured it out yet that inflation is basically over, but they will, and I think they’ll figure it out maybe very late this year or early next year. “, he said. “And I think as soon as they figure that out, you’re going to see a big increase in stock prices.”
Siegel believes that when the Fed recognizes that inflation is fading and decides to pause or even cut rate hikes, it will trigger a 15-20% rally in the S&P 500.
This story was originally published on Fortune.com
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