The U.S. has been heavily affected by rising prices over the last year and some experts say inflation is quickly fading while others say the opposite.
Key Details
- In the fallout from the 2020 pandemic the U.S. suffered a 9.1% inflation increase marking the highest 12 month increase since 1981. The record high inflation sent prices soaring bringing stress for both consumers and the stock market.
- Recently many, such as highly regarded market watcher Wharton School of Business Professor Jeremy Siegel, have begun to think that the record high prices could officially be coming down and that the S&P 500 could soar around 20% in the coming year.
- Others, like leading investor Pershing Square Capital head Bill Ackman, aren’t as optimistic and believe that the U.S. could continue to suffer from high rates that could potentially continue to increase.
Why it’s news
The U.S. has been suffering from record high inflation rates for the past year. In the wake of the COVID-19 pandemic American inflation reached 8.5% marking the highest rate since 1982.
Many investors have been hoping for the high prices to come down as many Americans have been forced to limit spending thus affecting the stock market as a whole.
To fight the high inflation, the Federal Reserve has raised interest rates to slow company borrowing and thus slow the economy.
Wharton School’s Siegel thinks that because of those rate hikes, 90% of inflation is gone and that prices will begin dropping—the data is just behind and hasn’t shown up yet, he says.
Siegel points to the housing market, saying that the market has begun slowing. There are 28 housing markets that have dropped 5% or more since this time last year and mortgage purchase applications are down 41%.
He says that the Consumer Price Index (CPI) data is lagged and hasn’t shown the slow down yet, but when it does inflation will go down considerably.
“My point has been housing has declined but the way the government computes it is so lagged that it will continue to show increases,” he says.
He goes on to explain that when the Fed realizes that inflation is actually slowing down and decides to stop hiking rates there will be a 20% rally in the S&P 500.
“It’s taken way too long for the Fed to get it and they haven’t gotten it yet that inflation is basically over, but they will, and I think they’re going to get it maybe very late this year or early next year,” he says. “And I think as soon as they get it you’re going to see a big increase in equity prices.”
On the other hand—billionaire hedge fund manager Bill Ackman thinks the opposite.
Ackman believes that inflation is far from over and it will take a long time until the Fed’s will be able to reach the targeted 2% inflation rate and it will have to continue raising rates to slow the economy.
“We do not believe that it’s likely the Federal Reserve is going to be able to get inflation back to a kind of consistent 2% level,” Ackman says.
Ackman explained that he believes it will be a long time before inflation slows down considering the many changes the economy has been facing. He says rising wages, the clean energy transition, and deglobalization will increase costs for companies and keep inflation elevated for a while.
“We will have to ultimately accept a higher level of inflation that has to do with deglobalization,” he says. “We are a big believer in the thesis that a lot more business is going to come closer to home and it is more expensive to do business here.”
