More U.S. economists are starting to publicly warn of rising inflation, with renowned economist Mohamed El-Erian saying he worries “a great deal” that inflation will not be transitory and arguing that there’s too much “on-the-ground evidence” that it will stay high.
In a recent op-ed in the Financial Times, El-Erian, who is one of the most widely followed economists, said central banks and markets need to “widen their perspective” to avoid significant damage to the economic and financial system.
El-Erian began his op-ed by stating, “It is not often that I take a very strong view that runs directly counter to the market consensus.”
He noted that the economic growth in the United States would be robust, but voiced skepticism over the “Goldilocks market consensus” that inflation will be transitory.
“I do worry a great deal, however, about the widespread conviction that the current rise in inflation will be transitory,” he wrote.
El-Erian backed his views by stating that there’s “all the on-the-ground evidence of structural changes in supply at a time when aggregate demand will remain robust.”
“To be clear, I do not expect a return to the inflation of the 1970s. But we have to respect the possibility of a shock to a financial system that has been conditioned and wired for the persistence of lower and more stable inflation,” he said.
El-Erian is president of Queens’ College at Cambridge University. He previously chaired President Barack Obama’s Global Development Council.
After decades of nearly zero inflation in the country, many investors have little idea about two historical dynamics, El-Erian warned.
“First, seemingly one-off increases in prices can cascade through the system,” he said. “Second, a rise in inflation can be persistent, starting with commodities and prices at the factory gate only to end up in consumer prices and wages.”
Many prominent economists including former Treasury Secretary Larry Summers have sent strong cautionary messages about how excessive government spending could overheat the economy and create damaging levels of inflation.
BY EMEL AKAN
