Mike Wilson, senior US equity analyst at Morgan Stanley, expects a “sharp drop in inflation” between now and the end of next year. Consumer price increases could drop to 4% or 5% by June next year, and back to 2% or 3% by the end of 2023, he told CNBC’s “Street Signs Asia” on Friday. This compares to October’s 7.7% increase from a year ago, which was less steep than expected. Stocks rose last week on investors’ hopes that a price hike is imminent. Investors have been watching comments from the US Federal Reserve closely for hints on when tightening might stop amid its war against inflation. But Wilson, who is also chief investment officer at Morgan Stanley, warned that “we are in a new era.” “In other words, there is less stagnation in the economy, particularly in employment and energy, which means that when the economy really accelerates, inflation will return and that will prevent the Federal Reserve from cutting interest rates to zero again,” he said. “I don’t think the Fed is going to go to zero again because … inflation is now. So they have to deal with that,” Wilson added. This follows other calls that the era of cheap money is over, signaling tough times ahead for sectors like technology. Wilson added that markets are going through a “boom-and-bust environment” — with shorter and hotter economic cycles. “We think we are entering a period in which economic expansions will continue for somewhere between three and four years versus an eight to 10 year period, because monetary policy cannot bail out as quickly as in the past – because inflation will now be in the background.” Inflation remains ‘steadier’ in these two areas Wilson said there are still two areas where inflation could be ‘steadier’: energy and employment. “Those are two areas where we’re a little bit deficient and that will keep inflation above 2% probably on a structural basis,” he said. Energy, in particular, is in a bull market structurally, “not even cyclically,” Wilson said. “I mean, it’s a new bull market for energy.” Energy is currently the only S&P 500 sector in the green over the year so far, according to FactSet.
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