Economist Mohamed El-Erian says potential volatility looms: 'Things will get worse before they get better'

Economic expert predicts another year of inflation as holidays loom

Chief economic adviser at Allianz, Mohamed El-Erian, argued more physical infrastructure will eventually lead to lower inflation as Democrats continue to negotiate a massive spending bill.

Economist and Allianz Chief Economic Advisor Mohamed El-Erian went on "Fox News Sunday" to discuss what investors can expect from the market given the circumstances of inflation, workforce shortages, and port bottlenecks. 

Host Chris Wallace asked how the demand of the holiday season would affect inflation and supply. 

"So as sad as I am to say this – it is what I expect – things will get worse before they get better," the economist said Sunday afternoon.

"We're going to have more shortages of goods. We're going to have higher prices. Inflation will remain in the four to five percent level. And it's just going to take time to sort these things out, Chris. These things cannot be sorted out overnight. There were many years in the making and then COVID pressed fast forward and got everything accelerated and that's where we are now.

Wallace pressed El-Erian, "What about the markets?"

"I worry a little bit that this wonderful world we've been living in of low volatility, everything going up may come to a stop with higher volatility. But a lot depends on behavioral changes," he said. 

"If I were an investor, I would recognize that I'm riding a huge liquidity wave thanks to the Fed. But I would remember that waves tend to break at some point. So I would be very attentive."

El-Erian also responded to the claim that inflation America is experiencing is a "high-class problem." The controversy bubbled after White House Chief of Staff Ron Klain appeared to endorse a view that downplayed inflation and shortages. 

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El-Erian said some parts were high-class problems because the demand for workers was causing pay incentives and wages to go up. Other parts, such as those felt at the gas pump, were not high-class problems. 

"That's not a high-class problem, but there are elements that are high-class. One, the massive demand for labor. So wages are starting to go up and that's starting to go up meaningfully. Second, the reason why there's so much inflation is partly due to a lot of demand. That's a lot of purchasing power in the economy. That's a good thing … But part of this inflation is good. Inflation part is bad inflation."

"We should expect more strikes going forward because workers now have greater bargaining power. Why is that happening? Part of it is the excess demand from people looking to hire quickly because demand has come back. But part of that is change behaviors. We feel that now we can negotiate higher wages without losing our jobs. We feel that we can go from one job to another and get sign-up bonuses. And some people don't want to come back into the labor force. They have changed their views about work-life balance."

El-Erian also disagreed with the view pushed by the Biden administration that inflation was temporary. 

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"I do not agree it is transitory, Chris. There is part of it that's transitory, that's COVID related, but there are things going on that are fundamentally much deeper than that. They involve change in behavior. So we should look forward for another year, at least of high and persistent inflation."

El-Erian also provided a four-point plan the government should do to address the problem. 

First, El-Erian said the Fed should "ease off" the monetary stimulus they continue to pump into the economy in response to COVID. "That made sense at the height of the emergency. It doesn't make sense now, so they should ease off the pedal to the metal monetary stimulus," he said. 

The second, he said, "involved infrastructure and human investments" in order "to get productivity back up."

Third, "We've got to look very seriously at excessive financial risk because what's going to happen if we're not careful is inflation, as it persists, will disrupt the financial markets that will then undermine the economy."

"And finally, we've got to get more people into the labor force. These things are feasible from an engineering perspective. What they require is the political will to implement them."

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