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There is a fundamental misunderstanding of inflation and its spread throughout sectors of the economy proves it is not isolated or transitory, Mohamed El-Erian says

Mohamed El-Erian.

  • Mohamed El-Erian said there is a fundamental misunderstanding of inflation because few people have lived through it.
  • “I always laugh when people say, oh, it’s isolated, it’s transitory,” El-Erian told CNBC on Monday.
  • He also disagreed with the Federal Reserve’s view that inflation is transitory.
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Economist Mohamed El-Erian in an interview Monday took aim at assessments of inflation that describe rising prices as “transitory”, stating that there is a fundamental misunderstanding of what inflation is and how it is already spreading throughout the economy.

“I always laugh when people say, oh, it’s isolated, it’s transitory,” the Allianz’s chief economic adviser told CNBC. “I think there’s a fundamental misunderstanding about inflation today because … most people haven’t lived through it for a long time and certainly most traders on Wall Street haven’t traded through it.”

El-Erian pointed to the surge is used cars prices to their highest in more than 60 years, which has been followed by an increase in prices of new cars, and an rise in the price of rental cars. This, he said, shows inflation is not contained.

“There is a logic to these inflation chains. They take time, and most people, unfortunately, haven’t seen them,” El-Erian told CNBC. “So they think everything’s isolated. Actually, it’s not. It’s interconnected.”

El-Erian, who is also the president of Queens’ College, Cambridge University, countered the longstanding narrative of the Federal Reserve that inflationary pressures are temporary.

The central bank slashed rates to historic lows at the start of the pandemic to stimulate economic activity and has signaled its intention of keeping interest rates unchanged until 2023.

Fed Chair Jerome Powell has repeatedly said that inflation will pass as the economy settles into a new normal. However, updated rate-hike projections six weeks ago signal that the central bank could see inflation posing a larger risk than initially thought. Powell is expected to issue a new statement this week, on July 28 at 2 p.m. ET.

“I don’t expect fireworks, El-Erian said. “The Fed has adopted a new framework that is backward-looking. They’re no longer forecast-based; they’re outcome-based.”

El-Erian also maintained that inflation will continue to run higher.

“The big question for me is not whether inflation will be higher than what the Fed expects,” he told CNBC. “It is whether the system is wired loosely enough to adjust to that – and that’s what we going to learn.”

The Consumer Price Index rose 0.9% between May and June, much more than the consensus estimate of 0.5%.

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