It’s no secret that investors are concerned about runaway prices for goods and services as the stock market is on track to record its worst weekly run since mid-June and also nears its worst performance since the Covid-19 pandemic that has more rolled across the US for over two years. years ago.
This week’s consumer price indices show inflation has been running at an astonishing pace of 8.3% a year since last month, virtually confirming that Federal Reserve chairman Jerome Powell is likely to continue on his warpath to raise benchmark interest rates in an effort to stop consumers and businesses from borrowing and spending.
But not everyone agrees that runaway prices for everything from food to cars to microchips are a longer-term problem. Some high-profile investors and high-profile social media users (and owners) are even voicing concern that the opposite could be the bigger problem facing Wall Street and Main Street.
Star stock voter Cathie Wood of Ark Invest (ARKK) warned in a webinar with investors this week that the Fed’s pressure to raise interest rates “will prove a mistake” and that it is more concerned about deflation, or that prices are actually falling.
Wood’s Contrary Call
Wood has been warning of deflation since last year, believing that disruptive innovation will drive down the price of obsolete goods and that artificial intelligence will help lower production costs. She is now doubling her call as some of the leading indicators she is looking at point to deflationary forces rather than inflation.
However, Wood said falling commodity and freight costs, as well as stable gold prices, indicate that the supply chain problems that have driven inflation to its 40-year high are moderating. At the same time, she said the US economy is likely to be in recession, which will ease price pressures.
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The markets are betting that the central bank will raise the benchmark rate by at least 0.75 percentage point next week, which would push the Fed Funds rate to its highest level since early 2007.
The Fed has raised interest rates four times this year for a total of 2.25 percentage points. That in turn caused turmoil in the bond markets, pushing mortgage rates above 6%.
Understanding why inflation is bad isn’t difficult: No one wants to pay more for goods and services if their wages and income remain the same.
Deflation is the bigger threat
Wrapping your head around why deflation is a problem is a little more challenging. First, when people expect falling prices, they become less willing to spend, and especially less willing to borrow, which can slow the economy down even more than if borrowing is more expensive.
More generally, falling prices tend to lead to slower consumer spending, which is an important part of economic growth. Companies respond to falling prices by slowing production, leading to layoffs and salary cuts.
Wood has at least one high-profile supporter of her view that the big surprise for investors and the markets is that prices are falling.
“We are now getting loud voices accompanying us on this deflation risk,” Wood said in her investor webcast, citing both Tesla founder and CEO Elon Musk and noted bond investor Jeffrey Gundlach in her comments.
Musk responded to a Twitter thread with Wood Wednesday that the central bank should “drop 0.25%,” with the Tesla (TSLA) CEO called falling commodity prices “neither subtle nor secret” and tweeted to his 100 million followers that “a major Fed rate hike risks deflation.”