Why this investment pro thinks Wall Street’s inflation fears are overblown
The sudden panic on Wall Street over inflation that triggered a stock-market meltdown is exaggerated and likely to ease up, according to a prominent investment strategist.
“This is a classic inflation scare,” said market veteran Michael Arone, chief investment strategist at State Street Global Advisors in Boston.
U.S. stock markets tanked in early February after a government report on employment trends in January showed hourly wages rising at the fastest yearly pace since 2009. Other inflation indicators have also been moving up since last summer and they could continue to edge higher in early 2018.
The consumer price index, for example, has climbed to a year rate of 2.1% from 1.6%. Not long ago, it also touched a five-year high.
The Federal Reserve’s preferred PCE inflation barometer, meanwhile, has risen to a 1.7% clip — not far from the central bank’s 2% target.
Yet Arone argues that a host of deflationary forces that have kept prices in check for years are still fully intact. As a result, he expects inflation to crest later this year around 2% and possibly even recede.
Under that scenario, the Fed is likely to remain on course for three increases in interest rates this year under new Chairman Jay Powell. In other words, Wall Street probably doesn’t have to fear a more aggressive Fed that jacks up rates four times in 2018.
“Investors have gotten a bit ahead of themselves regarding inflation,” Arone said in an interview with MarketWatch. “Some of these inflation figures will come back down.”
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It might not happen right away, however. The January CPI could rise 0.4%, economists polled by MarketWatch estimate.
Inflation has perked up lately because of rising rents and home prices as well as well as higher oil prices, the offshoot of a cheaper dollar. When the dollar falls in value, the cost of buying oil or other imported goods increases.
Inflation could also get a nudge, investors worry, from more expensive labor stemming from the tightest job market in almost two decades. The U.S. unemployment rate now sits at a 17-year low of 4.1%.
Consider wages: A more global labor market, the replacement of retiring baby boomers with lower-earning millennials and a lack of skilled applicants to fill open jobs has kept wages in check. Companies aren’t going to pay more for workers whose productivity is low and who require extra training.
“There’s a mismatch between what employers want and what employees have,” Arone said.
Innovations in technology are constantly disrupting the economy and reducing the costs of a variety of goods and services, Arone said.
The rise of the sharing economy, highlighted by Uber, or the advent of new technologies such as driverless cars, keep downward pressure on inflation, for example.
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Arone doubts inflation can rise to 3%, but even if it does, he points out the “economy has historically operated at 3% inflation for years” and done quite well.