Deflation could soon hit the US as real estate and stock prices are at risk of crashing, economist says

Traders work on the floor of the New York Stock Exchange in New York on November 25, 2008.REUTERS/Lucas Jackson

The US economy could soon be at risk of deflation, according to Wermuth Asset Management.

Wobbling commercial property values a correction of lofty stock valuations would drag prices lower.

Inflation accelerated 3.3% on an annual basis in July, well-below the pace of inflation recorded last year.

Disinflation could soo turn to deflation in the US, partly due to the risk of crashing stocks and real estate prices, according to Wermuth Asset Management.

Already, commercial property values are under pressure, while a potentially overvalued stock market could face a swift correction if conditions sour. A plunge in the price of these assets would go a long way in sparking deflation, the firm argues.

“To speculate about deflation again at this point looks premature at first glance, but not at the second. For several reasons the risk of a falling consumer price level has increased,” economist Dieter Wermuth said in a note on Wednesday, pointing to various pressures that could weigh down inflation in the economy.

That’s contrary to what other economists have been saying, with many warning that inflation is a lingering problem and will stay sticky. Prices accelerated 3.3% year-per-year in July, slightly higher than the 3% price growth seen in June.

But deflation could soon be in the cards when examining the huge downside risk that lies ahead for stocks and real estate assets, Wermuth warned.

The S&P 500 has rallied 16% from the start of the year, leaving stocks “dangerously overpriced,” Wermuth said, especially when considering the weakening outlook for corporate earnings. Businesses could struggle to maintain profits as financial conditions remain tight and inflation continues to cool off. That could result in one of the worst earnings recessions since 2008, Morgan Stanley has warned, an event the bank predicted could cause stocks to fall as much as 16%.

Trouble is also brewing in commercial real estate market. There’s around $1.5 trillion in debt in the sector that…


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