Wharton's Jeremy Siegel says hot inflation is not the enemy of stocks. Here's why

Published Tue, Jul 13 20211:04 PM EDTUpdated Tue, Jul 13 20212:04 PM EDT

Kevin Stankiewicz @in/kevin-stankiewicz-b5593466 @kevin_stank

Wharton School finance professor Jeremy Siegel told CNBC on Tuesday that rising inflation should not be seen as a reason to sell stocks. "Stocks are long-term excellent hedges against inflation," Siegel said in an interview on "Halftime Report," contrary to much of the conventional wisdom on Wall Street. "I think there's going to be a lot more inflation," added Siegel, a longtime market bull. But he added, "I'm not selling my stocks." One reason, in particular, why a pickup in price pressures right now is not bad for stocks is that many publicly traded companies appear able to pass on cost increases, Siegel said. "Firms have tremendous pricing power because people have so much liquidity. They say, 'Oh, my God. This went up in price, but I've got the money. I'm paying for it,'" he said. "So, the firms are having no trouble covering their costs. This is very different from the oil OPEC squeeze of the '70s, where people didn't have the money." "Today, they [consumers] have the purchasing power. Firms have the pricing power. They're going to pass on those price increases, and profits are going to be much higher," he added. Siegel's appearance came hours after the Labor Department's latest consumer price index was released, showing higher-than-expected inflation in June . The CPI jumped 5.4% from a year ago, above the 5% increase economists polled by Dow Jones had anticipated. Core CPI, which strips out volatile food and energy prices, was up 4.5% in June, significantly higher than the 3.8% estimate. It is the highest year-over-year jump for core CPI since September 1991. Price pressures have been felt across the U.S. economy, as activity picks up from coronavirus pandemic-related disruptions. Siegel has consistently argued that inflation will be more persistent than Federal Reserve officials have projected and urged the central bank to back off its highly accommodative monetary policy. For months, Fed Chairman Jerome Powell and other central bank officials have said they expect price pressures to be transitory, due largely to supply chain bottlenecks and other factors related to the unprecedented nature of the pandemic-era economic recovery. Due to that view, Powell has defended the Fed's easy-money policies — which include near-zero interest rates and at least $120 billion a month in bond purchases — as remaining appropriate in order to help the labor market recover. Powell on Wednesday and Thursday is set to deliver his mandated semiannual testimony on the state of monetary policy on Capitol Hill. Siegel reiterated Tuesday that he thinks the Fed is "behind the curve" on inflation but predicted the central bank will make an announcement about starting to scale back asset purchases, a process known as tapering, later this month or in August. The Federal Open Market Committee, which is the Fed's policymaking arm, is set to meet July 27 and 28 . The Fed's yearly economic policy symposium in Jackson Hole, Wyoming, is scheduled for Aug. 26-28 . While some market participants are worried about the implications of the Fed adjusting policy, Siegel said tapering bond buying, by itself, does not spell the end of a bull market. "The only thing is if they really panic" and end up aggressively tightening policy with a large interest rate hike, for example, Siegel said. However, he stressed, "We are miles away from there." At its June meeting, the Fed moved up its timetable for rate hikes, indicating two in 2023, after saying in March that it saw no increases until at least 2024. Siegel said he sees potential for the S & P to continue its strong start to 2021. The broad equity index is up nearly 17% year to date, as of Tuesday afternoon. "Another six months, we could definitely go up another 10%, 15% unless people really worry the Fed may be overreacting, and then we're going to see a correction," the professor said. "It's hard to time it, but I'm still in the market right now." Siegel also said he expects the 10-Year Treasury yield to finish the year above 2%, an outlook shared by other people on Wall Street. Yields have been declining in recent weeks, though, with the 10-year briefly touching 1.25% last week . It began the month around 1.58% and had reached 1.78% at one point in March. It started the year under 1%. Yields move inversely to prices. — CNBC's Jeff Cox contributed to this report .

Jeremy Siegel

Scott Mlyn | CNBC

Wharton School finance professor Jeremy Siegel told CNBC on Tuesday that rising inflation should not be seen as a reason to sell stocks.

"Stocks are long-term excellent hedges against inflation," Siegel said in an interview on "Halftime Report," contrary to much of the conventional wisdom on Wall Street.

"I think there's going to be a lot more inflation," added Siegel, a longtime market bull. But he added, "I'm not selling my stocks."