Mohamed El Erian: US inflation could reach 9% and lead to a recession

The economist expects an increase of 50 basis points at this week's US Federal Reserve rate-setting meeting

Mohamed El Erian, Allianz's chief economic adviser, repeated his criticism that the Fed 'fell behind' on inflation. Bloomberg

The US inflation rate may increase further and recession risks are “tilted in a negative way right now”, said Mohamed El Erian, chief economic adviser at German financial services company Allianz.

“I think you have got to be very modest about what we know about this inflation process,” Mr El Erian said during an interview on CBS’s Face the Nation programme on Sunday.

“And I fear that it is still going to get worse. We may well get to 9 per cent at this rate.”

The year-on-year increase in US consumer prices unexpectedly accelerated to 8.6 per cent in May, a new 40-year high that is expected to push the Federal Reserve to extend an aggressive cycle of interest rate increases.

Mr El Erian also renewed his criticism that the Fed “fell behind” on inflation and said he expects an increase of 50 basis points at this week’s rate-setting meeting.

“We are now in a period of stagflation,” Mr El Erian said, with a risk of persistent inflation that ends up tipping the US economy into recession. The best scenario would be that the Fed “regains control of the inflation narrative” and achieves a so-called soft landing, he said.

“Unfortunately, the balance of risks is tilted in a negative way right now,” he said.

However, Mr Erian cited the strong US labour market as a bright spot that’s “keeping us away from a recession right now".

"That is why a recession is a risk scenario, not a baseline,” he added.

_______________________

Watch: why is everything so expensive right now?