Elon Musk: Deflation is now a concern if the Fed makes a big rate hike

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What a difference five months can make.

In April, Elon Musk told analysts that he believed inflation was worse than reported at the time and likely to continue into 2022.

Now he’s singing (or tweeting) a different tune.

the Tesla The CEO is now worried that a big interest rate hike by the Federal Reserve could trigger deflation. “A big Fed rate hike risks deflation,” Musk he tweeted Friday without elaborating.

Just a month ago, at Tesla’s annual shareholder meeting in August, Musk said the economy was past its worst period of inflation, noting that the cost of most basic products and parts used in Tesla’s cars Tesla would decline in the next six months. Indeed, reported inflation in the consumer price index hit a year-over-year high of 9.1% in June before dipping slightly to 8.5% in July.

“The trend is down, which suggests that we have passed the peak of inflation,” Musk told the meeting. Bloomberg reported. He said he thought inflation “would come down quickly” and that he expected only a “mild recession” in the next 18 months.

In July, when Tesla released its second-quarter earnings, Musk had hinted that inflation would likely ease towards the end of 2022, but told investors to take that prediction with a grain of salt.

“Making economic forecasts is riddled with errors,” he said.

Musk’s latest comment on deflation comes as the Federal Reserve aggressively raises interest rates as it tries to cool the economy and rein in inflation, which hit a 40-year high in June. After being close to zero in March, the Fed rate now stands at 2.5% after two rate hikes. The Fed may launch a third hike at a meeting later this month.

Musk’s tweet warns that if interest rates rise once again, prices could drop dramatically. When consumers expect prices to fall, they often delay purchases until they believe prices will be lower, reducing overall demand.

Musk, the world’s richest person, is probably right to give investors some hope regarding easing in commodity prices. For example, the price of aluminum, an essential metal used in the manufacture of electric vehicles, has fallen. 18.7% since the beginning of this year.

This could affect whether consumers buy Teslas now or postpone purchases later, when electric vehicles may cost less. Tesla high prices for its cars in the US several times this year, most recently in June, citing supply chain problems and the high cost of raw materials.

Musk isn’t the only one worried about deflation. Cathie Wood of investment fund Ark Investment Management has said deflation is on the horizon, one of the reasons is monetary policy. Wood argues that technological progress would lower the cost of production and, consequently, prices.

There is currently a great debate about whether the economy has entered a recession. But the answer is unlikely to be clear cut. for several months.

Tesla reported better-than-expected earnings Last room despite ongoing supply chain pains. Musk maintained that the second half of the year could see improvement on that front. The Inflation Reduction Act announced by the Biden administration in August offers a huge boost to the electric vehicle industry and, of course, to Tesla. In fact, CFRA analyst Garrett Nelson sees Tesla as the biggest winner, Barron’s reported, as its car buyers will be eligible for a $7,500 tax credit.

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