In boardrooms Fortune 500 companies, in posh Wall Street bars and in the halls of business schools across the country, there has been a consistent debate about “what next?” for US inflation over the past year.
In recent months, a growing chorus of economists and business leaders has argued that the scourge of skyrocketing consumer prices is coming to an end. But a separate group of similarly seasoned economic minds believes that history shows that inflation is not so easy to tame.
Arguments from Wharton professor Jeremy Siegel and billionaire hedge fund manager Bill Ackman over the past week illustrate these opposing ideas.
Siegel said Monday he believes the Fed’s six rate hikes this year have already ended inflation, and the data just isn’t showing it yet.
“I think basically 90% of our inflation is gone,” he told CNBC, pointing to the slowing housing market as proof.
But Bill Ackman, the founder and CEO of Pershing Square Capital, said last week that he believes inflation is far from under control.
“We think inflation going forward will be structurally higher than historically,” he said on Nov. 17 during an earnings call with investors, arguing that trends such as deglobalization and the clean energy transition will lead to continued cost increases.
Ackman and Siegel are two heavyweights in the high-stakes inflation debate, and who turns out to be right can 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’s Structural Inflation and Equity Risk
Inflation, as measured by the consumer price index (CPI), increased by 7.7% in October from a year ago. While that is well below the peak of 9.1% in June, it is a far cry from the Fed’s target rate of 2%.
Many aggressive economists and business leaders argue that, even after this year’s aggressive rate hikes, the Fed still has a lot of work to do to really bring inflation under control. And Bill Ackman believes they may not reach the 2% at all.
“We don’t believe the Federal Reserve is likely to get inflation back to some kind of consistent level of 2%,” 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 increase corporate costs and keep inflation high for years to come.
In particular, Ackman argued that on-shoring — the relocation of formerly foreign business operations back to the U.S. — could increase labor and material costs for U.S. companies and increase inflation.
“We will eventually have to accept higher inflation related to deglobalization,” he said. “We strongly believe that a lot more business will move closer to home and it will be 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 with rate hikes. But he explained that this rising interest rate will only serve to push long-term bond yields higher, which is “a risk for stocks.”
Siegel’s shelter deflation and rising stocks
Siegel and more moderate 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 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 has ignored the ailing housing market because it looks at outdated CPI data, which measures changes in housing prices with a lag.
“My point is that housing has fallen, but the way the government calculates it is so behind that it will continue to show increases,” he explained.
The Wharton professor argues that new data over the coming months, including the Case-Shiller index of home prices, will well illustrate housing market deflation, causing the Fed to pause rate hikes.
“It’s taken way too long for the Fed to catch on and they haven’t caught on yet that inflation is essentially over, but they’re going to get it, and I think they might get it very late this year or early next year. get.” he said. “And I think once they get it, you’ll see a big uptick in stock prices.”
Siegel believes that when the Fed recognizes that inflation is declining and decides to pause rate hikes or even cut rates, it will lead to a 15% to 20% rally in the S&P 500.
This story was originally on Fortune.com
More from Fortune:
The American middle class is at the end of an era
Sam Bankman-Fried’s crypto empire ‘was run by a gang of kids in the Bahamas’ who all dated each other
The 5 most common mistakes lottery winners make
Sick of a new Omicron variant? Be prepared for this symptom