Most of the current record high inflation could have been avoided if the Federal Reserve had acted earlier and shown humility after it incorrectly described inflation as “temporary”, said economist Mohamed El-Erian on Sunday.
El-Erian, chief financial adviser at Allianz, appeared on CBS’s “Face the Nation” to discuss what caused the current inflation and where it would probably be heading.
“We came here because we have a combination of things happening,” El-Erian said, citing the war in Ukraine, the energy transition and how the Fed misjudged inflation and fell behind.
“All these things came together and now feed all this inflation. The price of almost everything goes up and makes us feel very insecure,”[ads1]; he said.
El-Erian said most of the inflation “could have been avoided if early action had been taken” by the Fed, which must now regain credibility to ease long-term inflation expectations.
“I was very confused when so many people a year ago were so sure that inflation was temporary,” he said. “There was so much we did not understand about inflation after COVID that humility would be a good idea.”
El-Erian said things were still not going well for the Fed because it had not yet explained why it got the forecast “so wrong for so long.”
El-Erian fears that in this current period of “stagflation” – low growth, high inflation – inflation could reach 9%. He called it the darkest picture of what could lead to a recession.
He added that his most optimistic outlook is that the Fed will regain control of inflation, leading to a “soft landing” – meaning that inflation will fall without sacrificing growth.