Taps Coogan – April 22nd, 2022

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Mohamed El-Erian, Allianz Chief Economic Advisor, recently spoke with CNBC to warn that while inflation may be peaking on a year-over-year basis in the coming months, we are “nowhere” near the end of our inflation problem and that the Fed may be forced to raise is 2% inflation target.

 

Mohamed El-Erian on the inflation outlook and the Fed potentially raising the inflation target:

“Mechanically, inflation will have peaked out for now. Why? Because base effects are going to be favorable. However, there is another inflation impulse coming in the system. It comes from the very high PPI (Produce Price Index) that we are having, it’s coming from a very tight labor market, so we cannot declare inflation over. Expect, especially core inflation, to persist at high levels. We are nowhere near the end of our inflation challenge.”

“Short term, we’re going to come off the 8.5% (CPI), but we’re not going to come off much and we may have a another leg up later in the year, especially if the Fed doesn’t get its act together… Longer term, we’re not going to get back to the Fed’s 2% this year or next year, so the Fed’s going to have a really difficult choice. It’s only a matter of time before you start to hear people talking about the Fed having to change its (inflation) target… What would force them to change their target is the recognition that by being so late they can’t get to their target and their credibility is threatened. They will also worry that by hitting the breaks too hard they may push this economy not just into a shorter term recession but into a longer term recession… Lots of people will push them to raise their target from 2% to 3% as a way out… We should have started QT (quantitative tightening) last year and we didn’t and we are now paying the consequences for being so late.”

If the Fed thinks that raising its inflation target will help its credibility, it’d better think again.