Taps Coogan – July 10th, 2021

Enjoy The Sounding Line? Click here to subscribe.

Mohamed El-Erian, Allianz chief economic advisor, recently spoke with CNBC to warn that inflationary periods always look transitory to policy makers, at least at the beginning.

 

Some excerpts from Mr. El-Erian:

“You forgot the lessons of inflation from the past. It starts out looking transitory. This, yes, it will self correct, this, yes, it will self correct, but next thing you know, you start a chain. It cascades and then it hits inflationary expectations. The good thing is we haven’t had to worry about these things for a very long time.  But those of us who are old enough to have lived through inflation, we know that it always starts being transitory. It always seem isolated… I am not saying that we are going back to the 1970s, but I am saying is that we are going back to a situation that the system is not wired for, which is persistently higher inflation than around 2%…”

“I understand where (the Fed is), but they are captive. They have what behavioral scientists call confirmation bias…”

The Fed has so far refused to define how long it thinks ‘transitory inflation’ might last, how high it might go, or how low it would eventually fall back to if left to its own devices. 

The Fed’s statements are perhaps best interpreted not as a genuine belief that inflation, left to its own devices, will prove temporary, but as a statement of desire. It wants inflation to run above target for long enough to raise people’s inflation expectations, and then fall back to something slightly above 2%. 

Good luck to the Fed in achieving such an equilibrium in an environment increasingly defined by the extremes produced by precisely that type of ‘Gosplanesque‘ logic.