Cathie Wood dismissed rising inflation fears despite US headline CPI rising to 4.2% in May, arguing that downward price pressures are close to disappearing.
Summary
- Cathie Wood says underlying inflation is close to 0.5% even though US headline CPI rose to 4.2% in May.
- The CEO of ARK Invest cites productivity gains and Truflation data to argue that inflationary pressures are easing.
- Wood believes that Fed Chairman Kevin Warsh can support economic growth if inflation falls to 0% to 1%.
According to the CEO of ARK Invest, the fear of inflation dominated the discussions during his recent meetings of investors across Asia and Europe, where many participants asked whether the continued growth of prices will force the Federal Reserve to tighten monetary policy further.
In a series of X posts, Wood said he was surprised by how investors expect the currency to remain high, adding that he believes inflation may be weaker for reasons beyond low oil prices.
The comments come as financial markets have raised bets that the Fed could raise interest rates by another 25 basis points in September after the latest inflation data. At the same time, Fed Chairman Kevin Warsh has continued to emphasize the central bank’s commitment to returning monetary policy to its 2% target.
Labor costs and real-time data point to weak revenue
Presenting a different view of price pressures, Wood argued that latent inflation is close to disappearing when measured in terms of labor costs rather than the subject of consumer prices.
According to Wood, US productivity rose about 3% year over year during the first quarter and hourly compensation rose about 3.5%. Using those figures, he said labor costs show an increase in inflation of only 0.5% year-on-year, meaning that businesses are not facing cost-related inflation.
Wood also pointed out other inflation measures that differ from official government statistics. Citing data from Truflation, he said the platform’s real-time gauge of inflation has dropped from around 11% year-on-year in 2022 to 1.8%, while the core inflation reading has dropped to 1.4%.
Based on those indicators, Wood asserted that current inflation trends are much weaker than the headline CPI figures suggest. He emphasized that investors who place too much weight on government inflation data may be ignoring signals from private sector production and price trends.
Wood expects Kevin Warsh to support growth if inflation moderates
Looking ahead, Wood said he believes Warsh understands the difference between official readings of inflation and trends across the broader economy.
According to his assessment, productivity gains help reduce inflationary pressure, while the government’s existing inflation measures contain methodological shortcomings that may lead to latent inflation.
Wood added that if the US economy continues to grow while inflation falls to a range of 0% to 1% or less, he expects the Federal Reserve under Warsh to put more emphasis on supporting economic growth instead of maintaining restrictive monetary policy.
His view is at odds with current market conditions, where traders have raised expectations for another rate hike following May’s stronger-than-expected CPI report. Still, Wood argued that continued improvements in productivity and easing cost pressures could eventually reduce the need for tighter monetary policy.
Concluding his remarks, Wood said he expects the Fed’s policy stance to change if inflation weakens, allowing the central bank to encourage economic growth rather than focus more on containing inflation.
