El-Erian, chief economic advisor at Allianz, appeared on CBS’s “Face the Nation” to talk about what caused the current inflation and where it was potentially heading.
“We got here because we got a combination of things happening,” El-Erian said, citing the war in Ukraine, the energy transition, and how the Fed incorrectly judged inflation and fell behind.
“All these things came together and are feeding this inflation. The price of nearly everything is going up and making us feel really insecure,” he said.
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El-Erian said that most of the inflation “could have been avoided if early action had been taken” by the Fed, which must now retrieve credibility to ease long-term inflation expectations.
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“I was very puzzled when a year ago so many people were so confident that inflation was transitory,” he said. “There was so much we didn’t understand about the post-COVID inflation that humility would have been a good idea.”
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El-Erian said things still are not going well for the Fed because it has yet to present why it got the forecast “so wrong for so long.”
El-Erian is concerned that in this period of “stagflation” – low growth, high inflation – inflation may reach 9%. He called it the darkest picture of what could lead to a recession.
He added that his most promising outlook is that the Fed regains control of inflation, which leads to a “soft landing” – meaning that inflation comes down without sacrificing growth.
Inflation has come to conquer dinner table talks as the price of food, energy, housing, and almost everything else Americans deal with on a daily basis vault higher. In May, it soared to its highest level since 1981, rising 8.6% from a year earlier as calculated by the Consumer Price Index. There is concern now that we may see a repeat of the 1970s, when the inflation rate averaged 7.1% for a whole decade, devastating household finances and the economy.
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This is a major surprise to a generation of consumers who had become accustomed to little or no inflation. Bloomberg Economics estimates that U.S. households will have to pay an extra $5,200 this year, or about $433 a month, for the same consumption basket.
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The causes for increasing prices are well-known: Supply-chain turmoil due to the COVID-19 pandemic led to shortages of goods, and Russia’s invasion of Ukraine hit the supply of key commodities. At the same time, the government directed trillions of dollars of aid directly to consumers and businesses. What’s not known is how long this unfortunate bout of high inflation will last and what, if any, will be its lasting impact. A good way to start looking for answers is by understanding what drives inflation and putting the current situation in context.
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