According to Wermuth Asset Management, the potential of falling stock and real estate prices might cause disinflation in the US to eventually convert into deflation.
Commercial property values are already under pressure, and an overheated stock market might experience a quick fall if things get bad. According to the business, a sharp decline in the price of these assets would significantly contribute to deflation.
At first glance, it seems premature to make predictions regarding deflation at this time, but not after further consideration. According to an economist’s note published on Wednesday, “the risk of a falling consumer price level has increased for a number of reasons,” citing a number of forces that could pull down inflation in the economy.
That goes against what other economists have been saying, as many have warned that inflation is a persistent issue and will continue to be sticky. In July, prices increased 3.3% year over year, which was a modest increase from the 3% price growth witnessed in June.
Wermuth cautioned that given the significant downside risk that stocks and real estate assets face in the near future, deflation may be on the horizon.
Since the beginning of the year, the S&P 500 has increased 16%, making stocks “dangerously overpriced,” according to Wermuth, especially when taking into account the dimming prognosis for corporate earnings. As long as money is tight and inflation stays low, businesses may find it difficult to retain profits. According to Morgan Stanley, that may lead to one of the biggest earnings recessions since 2008, which could force stocks to drop as much as 16%.
The market for commercial real estate is likewise under trouble. The industry has around $1.5 trillion in debt that will shortly mature and need to be refinanced, but because interest rates are now higher, banks are being less willing to lend. According to a forecast from Capital Economics, this might result in a large number of commercial properties going into distress, which would cause prices to drop by as much as 40%.
The US economy and other major global nations’ decreasing GDP growth will also contribute to falling inflation. Over the past year, the Fed has aggressively shrunk its balance sheet while raising interest rates to combat inflation.
“I’ve had enough. When central banks negotiate their next moves in mid- to late-September, it will be clear that deflation, not inflation, poses the greatest risk, predicted Wermuth.
Markets anticipate that the Fed will maintain interest rates at its September policy meeting as central bankers react to inflation developments. Investors are predicting an 89% possibility that the Fed would decrease interest rates in the first quarter of 2024, with the odds of this happening increasing.
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