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Inflation: 'These higher costs of living are going to be sticky,' analyst says

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Vaughan Nelson Investment Management CEO, CIO and Senior Portfolio Manager Chris Wallis joins Yahoo Finance Live to examine the position the Fed is in due to a 31-year high for inflation.

Video transcript

KARINA MITCHELL: Welcome back. Well, stocks are extending losses of benchmarks, all in the red after the latest CPI print showed inflation coming in hot, running at a 30-year high. Here to weigh in on the impact that has on investors and the markets is Chris Wallis, Vaughan Nelson Investment Management CEO, CIO, and senior portfolio manager.

Mr. Wallis, thank you for your time today. Just really want to quickly get your read, your take on this handle of above 6% inflation. What does it do to the psyche of the investors, of the market, of the ordinary person in the street?

CHRIS WALLIS: Yeah, you know, it's a big change. It's something we haven't seen in a number of decades. And unfortunately, it has not just an impact on the consumer, it'll start to have an impact on how asset prices reflect the change in the inflationary environment.

But more importantly, we're starting to see it play out in the political realm as well. I think that's why we're seeing some changes at the Fed. And it's going to be a contentious issue because while the inflationary pressures have stopped increasing, they really haven't abated. And when you look at what's in the pipeline for inflation, I wouldn't expect it to roll over significantly for some time.

ZACK GUZMAN: So I mean, what does that mean here when we think about hikes in 2022? We had a guest earlier saying multiple hikes. And it seems like that is the growing consensus. So how do you see that playing out?

CHRIS WALLIS: You know, I may take the other side of that. I think the Fed is in a really tough spot. The inflation we're seeing now is really caused by the excess stimulus, meaning we pumped an extra $1 and 1/2 trillion over and above the loss in personal income as it related to COVID. And that excess stimulus is what's flowing through the system.

I know there's a lot of talk around we'll get the supply chain disruptions corrected in '22, and then that'll help ease inflationary pressures. But when you look beneath the surface, yeah, inventories are low at the retail level. But when you look at wholesale and manufacturing, they're normal to elevated. What we've essentially done is pulled demand forward with that excess stimulus.

So as we work through these supply chain issues, I think we're going to discover a lot of double ordering. I think we may see a little bit weaker, not just consumer spending in the back half of '22, but also on the industrial and services side. And so, we're going to have sticky inflationary pressures because there's a whole host of factors there, but slowing growth.

That's going to put the Fed in a very difficult position. Are they really going to want to raise rates in that slowing environment? Maybe. If they want to, they'll hurt some areas of the market, the riskiest areas of the markets. It may calm some of the inflationary expectations, but I think it's going to be difficult to have a significant number of rate hikes in '22 because, quite frankly, economic growth is going to be slowing on a material fashion by the back half of '22.

KARINA MITCHELL: You know, it's very interesting. The one thing this print doesn't tell us is, is this a peak? Does it come off it? Does it start to cool after this? And we really don't know what does the Fed do about it all? It's all a wait and see, and it's a guessing game. I want to ask you, what do you see happening in the housing and the rental market well into next year? When do we start to see prices start to come down? Do we?

CHRIS WALLIS: Yeah, not right away. I mean, the housing is also a lot like fossil fuels. This is an area we underinvested in for several years. Post the GFC and the housing crisis, we've had a lack of capital flowing into the space. We've been working off excess inventories. And we've done it at a time when demographic growth for, you know, household formations has been increasing. And so we've seen an acceleration in demand in the last couple of years, and yet, undersupply for a number of years.

And these are durable, large Capex infrastructure type permitting and investments to meet these needs. It's just going to take a long time to get supply and demand back in balance. The same's going to be true from an energy standpoint. The same is going to be true from soft commodities, agriculture, and food. So these higher costs of living, they're going to be sticky because it's as much a shift in secular trend as it is anything related to monetary policy.

ZACK GUZMAN: I mean, I also would highlight there some opportunities here to talk about prices going down in some categories. Of course, airlines have seen fares drop. A lot of that had to do with the delta spread. I believe alcohol prices also came down, which is a good thing for some people out there. And apparel unchanged, as we've continued to see kind of some of the longer back into the office clothing shopping just not need to happen yet.

But I mean, when you look at kind of next year and this return to normal, we've discussed some pent-up demand fueling growth in some of those areas, perhaps the ones I just mentioned. But what do you see, I guess, as kind of how that changes in terms of how people should be investing for 2022?

CHRIS WALLIS: You know, I think you need to take a fairly cautious approach. This rally we've seen in the fourth quarter was driven by excessive bearish positioning. And as COVID rolled over, we saw a little acceleration in economic activity. And so we've seen the short covering. We've seen the high beta moves. We may have seen the bulk of the near term rally that we're going to see in the fourth quarter.

That said, we are going to see certain areas where supply disruptions are an honest factor in missing fourth quarter earnings or soft guides into the next quarter. That will show strength in the next year. And to the extent those are even the more cyclical areas, there's no reason you can't maintain some exposure there.

The one area that I think has been weak this year that probably will see some strength is health care. There is a tremendous amount of pent-up demand for health care services. We're going to see acuity levels remain relatively elevated. Access to care has been limited. And so I think it's going to be a fairly robust area for a renormalization of activity levels within the health care supply chain. And I think that's going to be a good area to be exposed to, especially for right and that we see some real weakness broader in the economy in the back half of '22.

ZACK GUZMAN: All right, Chris Wallis, Vaughan Nelson Investment Management CEO, CIO, senior portfolio manager. I appreciate you taking the time here to chat with us today.

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