Economic adviser El-Erian: Inflation rate could reach 9%, US economy in stagflation

A leading economic adviser warned on Sunday that the US inflation rate could reach 9%.

In an interview on CBS News’ “Face The Nation,” Mohamed El-Erian, Allianz’s chief economic adviser, said recession risks are “tilted negatively right now.”

“I think you have to be very modest about what we know about this inflation process,” he said. “And I’m afraid it will get even worse. We could well get to 9% at this rate.”

According to El-Erian, the Federal Reserve has yet to explain “why it has been so long wrong in its forecasts.”

“The European Central Bank, they were in the same position; they explained why,” he said. “And that’s important, because until you get your credibility back, you can’t get inflation expectations under control.”

El-Erian said the country is in a period of stagflation, with the risk of lingering inflation eventually tipping the economy into a recession.

“We are now in a period of stagflation, which means lower growth and higher inflation. The darkest period is that inflation persists, heads towards 9%, people start to worry that it hits 10% and the next thing you know, we end up in a recession. And it would be tragic if that were to happen,” he said.

“Because again, it is the most vulnerable segments of the population that are being hit hard,” he continued. “What’s best is for the Fed to regain control of the inflation narrative, and we have what’s called a soft landing: inflation is coming down without us sacrificing growth too much. Unfortunately, the balance of risks is currently tilted in the negative direction.”

But El-Erian said the country has a strong labor market, “and that’s what’s keeping us out of a recession right now.

“That’s why the recession is a risk scenario, not a benchmark,” he said. “The only bad thing about our labor market is that we don’t have enough labor market participation. We don’t have enough workers. We have twice as many jobs open as there are. workers, and what we need is more workers to enter the labor market.This would contribute enormously to our economic prospects.

El-Erian lamented that things could have been handled differently.

“It started mostly with external, exogenous things, if you will, that we imported,” he said of inflation. “But then the Federal Reserve didn’t react. They misread what inflation is and they fell behind. And the lessons of history are that once you fall behind, you lose. the ability of the first best answer. You find yourself in this horrible situation that we are in today where you have to make a choice. Do you press the brakes to control inflation and the risk of recession? Or do you just press on the brakes and risk inflation lasting much longer than it should?

“What makes this very frustrating is that it was partly preventable,” he said. “It’s going to have huge economic, social consequences – it hits the poor, particularly hard – and institutional and political consequences. And most of them could have been avoided if early action had been taken.”

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