Markets may need to ‘continue to be concerned on wage push inflation’: Investor

Thomas H. Lee Partners Co-CEO Scott Sperling joins Yahoo Finance Live to weigh in on core PPI and consumer sentiment data, along with potential wage inflation.

Video transcript

DAVE BRIGGS: Let's get you up to speed now on some key economic data out today, excluding food and energy. The core PPI, which measures what companies get for their products, essentially, up 0.4%. That is hotter than the expected 0.2%. A 38% surge in wholesale vegetable prices helped push the food index up 3.3%, the same number by which energy costs declined.

Now the Consumer Price Index is due out Tuesday morning, so we'll get a better glimpse. But we also got an update today on consumer confidence. The University of Michigan index rising to 59.1 from 56.8 in November, far better than the expected 53.3. Joining us now to discuss this and the state of the private equity market is Scott Sperling, Thomas H. Lee Partners co-CEO. Scott, nice to see you.

SCOTT SPERLING: Nice to see you.

DAVE BRIGGS: Let's talk about that economic data we got out this morning. If you're the Fed Chair, how do you look at it?

SCOTT SPERLING: I think you remain concerned about inflation as something that will be more persistent than we like. We know that inflation is one of the more insidious problems in the economic sphere. People talk about the toothpaste getting out of that tube and the impossibility of getting it back.

I think when we look at the various elements of inflation, one has to continue to be concerned about wage push inflation, about the fundamentals behind some of the key commodities and inputs into our economic activity, principally policies in the United States having to do with not just the energy portion of oil and gas, but also the fact that those are major feedstocks for a lot of industrial products.

So I think that there are fundamentals that one has to be concerned about. The thing that has been holding inflation back to some extent has been the fact that I think people anticipate a recession. Economic activity, in many ways, has slowed down in a number of sectors, and that is putting a little bit of a cap on it. How the Fed balances those two things, I think, will be really interesting.

It may be that the market's not wrong in the sense that the Fed will ease up on the amount of interest rate increases that they do at each of the appropriate meetings to that 50 basis point next time, maybe to 25 basis points after that. But we may have these higher interest rates go a bit higher than the market's currently predicting. And they may sustain for longer than the market is currently predicting.

SEANA SMITH: Scott, when it comes to inflation, are you confident that we have seen peak inflation? And some of those stickier parts of inflation, how long do you think that is going to remain?

SCOTT SPERLING: I don't think we've fully absorbed, again, the wage push inflation that we're seeing. You can look at some of the contracts, particularly some of the new union-based contracts in transportation in particular. And those are reasonably high rates of increases. They may be justifiable, given inflation of the cost of everything. But we should not underestimate the impact that that will have on sustaining higher wage inflation rates.

The amount of spending that we'll see into things that increase productivity is going to be very important in terms of managing through some of these things. Labor shortages are still a big issue in a lot of different parts of our economy. Automation is going to be really important in helping to close some of those gaps, particularly for less attractive types of activities for humans. And we're seeing a lot of that occur.

But we're going to have to be really careful as we manage through this. And again, the fundamentals of things like regulation tends to raise the cost of doing business. That has increased dramatically. And obviously, the energy policy, when we're talking about carbon-based fuels, particularly in the United States, but also around other parts of the world, may be problematic from that aspect.

DAVE BRIGGS: I know nothing gets you out of bed, Scott, like an Elon Musk tweet. He just now says if the Fed raises rates again next week, the recession will be greatly amplified. Now, again, higher rate bad for Tesla, down 54% this year. Set that aside, what do you think about a recession and about that prediction?

SCOTT SPERLING: Well, I think there are very few people at this point who are not predicting a recession sometime in the next 14 months. I think the most recent economist survey, 100% of the economists were predicting that. Now that may be the best news we can have because it's not likely that 100% of the economists are technically right.

But nonetheless, let's assume that there's a recession. I'd also look to a comment, I think, Larry Summers made that I don't know why we talk about soft landings because we haven't had one. I think that's a paraphrase, but I think that's actually accurate that we tend not to have soft landings. They're nice in concept, but normally, it's pretty rough. The question is duration. And the more we get ahead of inflation right now, I think the shorter the duration of the economic problems that we might have will be.

The markets probably still have another leg down or two. There will be some corrections. There will also be some great buying opportunities there. I know that as we look at opportunity sets in the private markets, they're becoming increasingly attractive.

There has been a major migration, as you know, in our economic activity to the kinds of companies that have superior business models-- more reliable revenue streams, the so-called annual recurring revenue type things, and business models that tend to do better in economic downturns. We are seeing more economic activity come back to the United States, also back to Europe.

The nature of investment that we're going to be making in things like semiconductor are crucially important and will be a source of economic stimulus. So I think if we can get inflation under control, and we get through the next 12 to 18 months, then I would hopefully see a strong uplift after that.

SEANA SMITH: All right, Scott Sperling, great to have you. We hope to have you back here on Yahoo Finance. Thanks so much for joining us this afternoon.