Markets have interpreted that as positive news for stocks, as cooler inflation in the economy could lead the Federal Reserve to soon pause rate hikes or even cut interest rates.
But it takes around 12 months for the full effect of rate hikes to surface in the real economy, Wilson said. That could mean inflation will cool much faster than expected, to the point where prices actually begin falling. The result could end up being not just disinflation—where prices rise at a slower pace—but outright deflation, wherein prices decline.
That would be bad news for stocks, as companies saw an earnings boost throughout the last year of high inflation as they were able to pass on higher costs to their customers. "We think inflation is likely to surprise on the downside," Wilson said."A move to disinflation is positive for stocks, because valuations typically rise under those circumstances. However, that has already happened. Now, we expect disinflation to shift to deflation in many parts of the economy.
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