Top economists and executives are sounding the alarm about the economy and warning that a recession may be imminent after inflation accelerated to 8.6% in May.
Some had expressed hope in April that inflation was finally under control when its rate declined to 8.3% from a previous peak of 8.5% in March. That downward trend, however, proved to be a hiccup in a climb that’s lasted nearly a year.
“I never shared those hopes,” said economist Mohamed El-Erian on CBS’ Face the Nation on Sunday, adding that he believes experts should take a more modest view about taming inflation.
“And I fear that it’s still going to get worse,” he said. “We may well get to 9% at this rate.”
The inflation rate increased in May despite the Federal Reserve’s efforts to curb rising prices by adjusting its baseline interest rate twice in the last year, first in March and again in May.
El-Erian, chief economic advisor of financial services firm Allianz and president of Queens College at Cambridge, discussed the economy’s current state of play on CBS, first outlining the circumstances that have led to the current rise in inflationary, including Russia’s invasion of Ukraine.
The Fed, said El-Erian, didn’t respond quickly enough: “The Federal Reserve mischaracterized inflation and fell behind.” The bank lost credibility as a result, he said, and with it its power to easily control the problem.
“Until you regain credibility, you cannot get on top of inflation expectations,” he said, adding that he expects the Fed to raise its interest rate another 50 basis points after the Federal Open Markets Committee (FOMC) meets this week.
While goods and services like housing, airline fares, and used and new vehicles saw the highest price increases in May, almost all other products became more expensive as well, according to the latest inflation report from the Bureau of Labor Statistics. “It’s making us feel really insecure,” said El-Erian about inflation’s now wide-ranging impact.
If the Fed had acted sooner, he argued, it could have avoided the position it’s now in. In March, Fed Chair Jerome Powell admitted to Congress that the bank had acted too slowly before instituting its first rate hike. “Hindsight says we should have moved earlier,” he said.
El-Erian also outlined best- and worst-case scenarios for the economy’s immediate future. The worst case would be inflation continuing to rise and the economy falling into a recession.
The best case, he said, would be a “soft landing” for inflation, in which its overall rate declines without the economy’s growth suffering much as a result.
Experts continue to waver on whether a “soft landing” is still possible. At a press conference following an FOMC meeting in early May, Powell hedged his language and said he sees a path to a “soft-ish” landing for the U.S. economy.
“Unfortunately, the balance of risks is tilted in the negative way right now,” said El-Erian.
Sign up for the Fortune Features email list so you don’t miss our biggest features, exclusive interviews, and investigations.
