Top economist Mohamed El-Erian says inflation could get ‘stuck’ at an uncomfortably high number because of supply-chain issues and a ‘change in globalization.’
Falling commodity prices and easing supply chain pressures have helped bring U.S. inflation down from its 40-year high in recent months.
But some economists are warning that the path back to the Federal Reserve’s 2% inflation target will be long and arduous.
“We may have an issue where inflation gets stuck at around 4%,” Mohamed El-Erian, president of Queens’ College at the University of Cambridge, told CNBC on Monday.
El-Erian argues that the supply chain issues that have plagued the economy over the past two years and increased inflation won’t be overcome easily as the world is in the midst of a “profound economic and financial shift” that isn’t “temporary or quickly reversible.”
“You cannot rewire supply chains overnight,” he told CNBC, adding that public protests in China, which were sparked by the government’s strict zero-COVID lockdown measures, will only serve to worsen supply-chain issues and inflation.
The former Pimco CEO and famed market watcher also described how rising geopolitical tensions between global superpowers will force many corporations to move their operations to more friendly countries (near-shoring) or back home (re-shoring), which should add to inflation as well.
Add rising wages and the clean energy transition to that recipe, and U.S. inflation is bound to remain elevated, El-Erian wrote in a Monday Financial Times op-ed, calling it a “tricky situation” for the Federal Reserve.
The Fed has raised interest rates six times this year to fight inflation, but El-Erian notes the central bank is doing this while also coping with slowing economic growth and the risk of financial instability – something he calls a “trilemma.”
Click here to read the full report from Will Daniel in Fortune.com.