Leading economist Mohamed El-Erian says inflation could be ‘stuck’ at uncomfortably high levels due to supply chain issues and ‘shift in globalization’
But some economists are warning that the road back to the Federal Reserve’s 2% inflation target will be long and arduous.
“We could have a problem where inflation is stuck at around 4%,” said Mohamed El-Erian, president of Queens’ College at Cambridge University. told CNBC in Monday.
El-Erian argues that supply chain problems have plagued the economy for the past two years and that rising inflation will not be easily remedied as the world is in the midst of “profound economic and financial change” that’s not “temporarily or rapidly reversible.”
“You can’t reprogram the supply chain overnight,” he said. told CNBCAdd that public demonstrations In China, it’s spark by the government’s strict lockdown measures to prevent COVID, will only exacerbate inflation and supply chain problems.
The former PIMCO CEO and prominent market observer also describes rising geopolitical tensions between global superpowers that will force many corporations to move their operations to friendlier countries (near- shoring) or re-shoring, which will also increase inflation.
More increased and clean wages energy transition to that formula and U.S. inflation is certain to continue to soar, El-Erian wrote in an article Monday. Financial Times op-edcalled it a “difficult situation” for the Federal Reserve.
Fed raised interest rates six times this year to fight inflation, but El-Erian noted that they are doing this while also dealing with slowing economic growth and the risk of financial instability—what he calls ““impossible trio.”
El-Erian warned that the Fed’s tough mandate meant the risk of a recession remained high, arguing that too many investors and economists were attached to the “short and shallow” recession theory. “.
“I worry that this could constitute a repeat of the analytical and behavioral traps that emerged during last year’s bad inflation call and consequences that we have yet to address,” he wrote.
El-Erian believes the U.S. economy can still avoid a recession or only a mild one thanks to a strong labor market and steady consumer spending, but he also argues that investors should be prepared. Get all results and be cautious.
Both analytical and behavioral factors suggest that we should be wary of the ‘short-term and shallow’ consensus call. “Companies, governments, households and equity investors should plan to consider a range of possible outcomes, with no one dominant as the basis. Such fluidity requires as much protection as possible against policy errors, corporate mistakes, and market crashes.”
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