The Fed continues to insist high inflation is “transitory,” but experts interviewed by Forbes think higher prices will stick around for longer.
Ifit feels like you’re paying more for everyday goods, it’s because you are. Inflation is surging at the fastest pace in over 30 years and doesn’t appear to be slowing down anytime soon. Some experts say high inflation is just temporary, while others think it could last well into next year—or longer.
The consumer price index, a key measure of inflation, rose 6.2% in October compared to a year ago, according to the most recent data from the Bureau of Labor Statistics. Supply chain disruptions and labor shortages have only exacerbated the issue. Spooked investors are now looking ahead to 2022, wondering how the Federal Reserve will react if inflation doesn’t moderate and return to the central bank’s long-term 2% target rate.
Although investor fears over higher prices continue to rise, they haven’t derailed markets just yet. Stocks remain near record highs—boosted by solid third quarter earnings—and now look poised to rally through the holiday season.
But market experts and economists interviewed by Forbes largely think higher inflation is here to stay, which could derail markets down the line. They also remain bullish on U.S. economic growth over the long-run, despite a period of higher costs. The main concern, they say, is how the Federal Reserve will react—and how that will affect markets, which are likely to be bumpy next year.
The Federal Reserve announced last month that it would begin reducing the historic level of stimulus it has been providing markets since the Covid-19 pandemic began, which is also making investors wary.
Minneapolis Fed president Neel Kashkari said in an interview with CBS News earlier this month, investors shouldn’t “overreact to some of these temporary factors.” He added, “The math suggests we’re probably going to see somewhat higher readings over the next few months before they likely start to taper off.
Here’s what some of Wall Street’s top experts are expecting.
Moody’s chief economist
The current surge in inflation is largely due to the pandemic and more specifically the Delta variant, which was a “classic supply shock that slowed economic growth,” Moody’s chief economist Mark Zandi tells Forbes. “As the pandemic winds down and the Delta wave fades, inflation will gradually begin to moderate,” he predicts. That won’t happen quickly—due to significant supply chain and labor market issues, he clarifies, but by the start of 2023 he does expect inflation to be within distance of the Federal Reserve’s target goal.
While the “worst is over” with supply chain disruptions, it will take well into next year for them to moderate and get to a place where inflationary pressures start to abate, Zandi predicts. Moody’s chief economist thinks economic growth will remain strong—and it should pick up as inflation goes back down and the Delta variant fades. Recent job numbers, retail sales, auto sales and unemployment insurance claims are all showing signs of improvement, he points out.
There is a high chance that markets will be more volatile in 2022, with “signs of speculation” and high valuations, Zandi says, adding that asset prices will be “very vulnerable to higher interest rates.” If the Federal Reserve has to become more aggressive and pull forward expectations, Zandi expects “tough going” for markets in 2022 with a correction on the horizon.
Professor of finance at University of Pennsylvania Wharton School of Business
Despite the Fed reiterating its stance that higher inflation is “transitory,” other market experts are not so sure and predict otherwise. “I’ve been worried about inflation for a while,” says Jeremy Siegel, professor of finance at the University of Pennsylvania’s Wharton Business School. “The jump in money supply we saw during the pandemic was unprecedented and inevitably going to cause higher inflation,” he adds, predicting cumulative inflation of between 20% to 25% over the next three or four years.
Siegel warns that if the market gets another bad consumer price index reading in December, “there is no question that Powell will be forced to accelerate the tapering due to political and economic pressures.” Markets will be bumpy once the Federal Reserve gets more serious about dealing with inflation, and “we could easily have a correction of 10-15%,” Siegel predicts.
“Once the Fed changes its stance on raising rates, the market will have to take a pause at some point in early 2022,” he predicts. “But then again earnings have been spectacular — this is a much better founded bull market than in 2000.” Economic growth should remain strong despite higher inflation, as the Delta variant burns out and the economy continues to reopen, he says. “We could easily see 4% to 5% GDP growth next year.”
Founder of Gamco
Billionaire and famous value investor Mario Gabelli, who started his investment firm Gamco in 1977, also expects inflation to continue. “This is a cycle that has legs to it,” he says, predicting interest rates will rise as a result.
Though inflation will remain high, he expects economic growth—powered by solid corporate earnings—to continue, though a stock market correction could be on the horizon next year. Gabelli predicts that stock multiples are likely to contract in the face of tighter monetary policy from the Federal Reserve over the next five to ten years. “A lot of this excess liquidity is creating speculative bubbles that are not sustainable,” he says, adding, “There are cushions in the stock market in terms of rising earnings and fundamentals, but I see a possible correction of 10% to 15%.”
The billionaire investor thinks that despite rising costs due to inflation, many companies will still be able to get pricing traction, which should keep earnings and revenue numbers strong. For now, amid supply chain issues and a tight labor market, “companies are hedging inventories and raising prices,” he describes.
Founder of Ark Invest
On the other side of the spectrum, growth investors like Ark Invest’s famed stock picker Cathie Wood think worries about the current inflation “burst” are overblown. She predicted innovations like AI and robotics to lead productivity gains, which should help lower prices over the long-run.
Another factor working against inflation is the strength of the U.S. consumer who is holding lots of inventory at home, Wood told Forbes in an interview last month. “When companies who are probably double and triple ordering right now have filled the shelves, they’ll probably find that the consumer has enough.”
Managing director at Zevenbergen
There was a bit of a “knee-jerk reaction” to the latest consumer price index data from October, says Lisa Foley, managing director at $5.7 billion (assets) Zevenbergen Capital Investments. “I don’t fear inflation as much as other people,” she says, adding that she expects it to be “transitory.” Foley points out that even as it takes inflation some time to moderate, economic growth and corporate earnings will remain strong.
“There are still a lot of industries that will produce significant profit in this environment,” she says, adding that numerous companies will continue to see strong revenue growth despite inflation as they are able to pass pricing on to customers without hurting demand.
Co-head of Global Value at First Eagle Investment Management
“I can’t remember a time where more companies were talking about labor shortages and raising prices,” says Matthew McLennan, co-head of the Global Value team at First Eagle Investment Management. “We’ve added tons of demand, but the supply side hasn’t bounced back.”
McLennan expects inflation to moderate somewhat before settling at 3% or 4%. “There are a lot of question marks for the economy going forward—the next few years of growth might be below the prior generation,” he warns.
His main concern, which could lead to market volatility, is that the “Fed is behind the curve” with its policy response. The central bank has not yet adequately tightened its policy to deal with a higher inflation environment, he says, instead letting the economy get up to steam by allowing inflation to run above the trend.
“You can’t discount the possibility that markets will at some point react sharply fearing the Fed has made a policy mistake,” McLennan predicts. “If we enter a window of greater market volatility because of increased fears around inflation, the Fed may find it difficult to tighten monetary policy and find itself in a Catch 22,” he says.
Chief economic advisor at Allianz
“I think the Fed is losing credibility,” Mohamed El-Erian, chief economic advisor at Allianz, similarly said in an interview last week. The Federal Reserve has oft repeated the mantra that inflation is transitory, but that is not the case, he says: “It is not transitory… this will last for a while.”
Companies are charging higher prices, supply chain disruptions are lasting longer than expected and consumers are hoarding products ahead of time, all of which put added pressure on inflation, El-Erian described. He called on the Fed to “reestablish a credible voice on inflation” and to “accelerate, in December, the pace of tapering,” not to mention “start preparing people for higher interest rates.”