Top Economist Warns “75% Chance” of Inflation Rebounding or Remaining High

Although inflation is slowly falling, it’s still a problem. “dangerous” Assume that the problem has been solved. U.S. economy.

This is according to Mohamed El-Erian, a top economist who warned Project Syndicate this Week that there’s a 75% chance for inflation either remaining high or rebounding and spiking.

New Year began with optimism that the long-running problem of high inflation in the U.S. was ending. The Labor Department reported that December’s consumer price index dropped 0.1% and rose 6.5% from the previous calendar year. This is the slowest pace since 2021. 

El-Erian believes that optimism is not a good thing. El-Erian believes that there are equal chances of inflation continuing to drop steadily or that consumer prices will reverse recent declines, and then rise sharply again. He wrote that the most likely scenario is for inflation to remain. “sticky” The average settles between 3% and 4%. 

INFLATION STILL EXCEEDS WAGES IN MOST US CITIES

Mohamed El-Erian (chief economic adviser at Allianz SE) gestures during an Allianz SE event at Cambridge Union with Andrew Bailey (guvernor of the Bank of England), on Nov. 25, 2020. (Hollie Adams/Bloomberg via Getty Images/Getty Images

“This would force the Fed to choose between crushing the economy to get inflation down to its 2% target, adjusting the target rate to make it more consistent with changing supply conditions, or waiting to see whether the U.S. can live with stable 3-4% inflation,” He stated. “I do not know what the Fed would choose in such a case, but I would put the probability of such sticky inflation at 50%.” 

Although the U.S. inflation rate has fallen from the peak of 9.1% reached in June, there is still evidence of price pressures. The price of gas is up 26 cents compared to one month ago. Core inflation excludes volatile food and energy measurements. However, it remains stubbornly high. And last week, the Labor Department reported that the economy added 517,000 jobs in January — nearly triple what Wall Street expected.

All this despite the Federal Reserve’s most aggressive interest rate increase campaign since 1980. The federal funds rate has been raised eight times in a row to 4.5% to 4.75%, a change that was nearly zero in March 2022. 

The market expects the Fed to raise rates at minimum two more times this fiscal year. However, the markets are predicting a higher peak rate after the January jobs report. (Liu Jie/Xinhua via Getty Images) / Getty Images)

FED’S POWELL SAYS BLOWOUTJOBS REPORT SHOWS INFLATION FIGHT HAS WAYS TO GO

Fed Chairman Jerome Powell has praised the Slow but steady fall in inflationNevertheless, she indicated in a Tuesday question-and answer that the central banks still has a lot of work to do to reduce consumer prices.

The market expects the Fed to raise rates at minimum two more times this fiscal year. However, the markets are predicting a higher peak rate after the January jobs report. Numerous Fed officials If the strong economy continues, this week’s rate hikes were more drastic than anticipated. 

Jerome Powell, Chair of the U.S. Federal Reserve, is present at a Washington, D.C., press conference on July 27, 20,22. (Liu Jie/Xinhua via Getty Images / Getty Images)

This could lead to financial distress for millions of Americans as rising borrowing costs, volatility in stock markets and potential recession could all contribute to the economic downturn. 

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El-Erian stated that the Fed should not do too much and there is greater risk of it doing too little. 

“If an inflation scare is temporary, the best way to deal with it is simply to wait it out,” He stated. “That is why this narrative is particularly dangerous. By encouraging complacency and inertia, it could exacerbate an already serious problem and make it harder to solve.”