Economic Adviser El-Erian: Inflation Rate Could Hit 9 Percent; US Economy In Stagflation

A top economic adviser on Sunday warned the U.S. inflation rate could increase to 9%.

In an interview on CBS News' "Face The Nation," Mohamed El-Erian, chief economic adviser to Allianz, said recession risks are "tilted in a negative way right now.

"I think you've got to be very modest about what we know about this inflation process," he said. "And I fear that it's still going to get worse. We may well get to 9% at this rate."

According to El-Erian, the Federal Reserve has yet to explain to "why it got its forecast so wrong for so long.

"The European Central Bank, they were in the same position; they explained why," he said. "And that's important, because until you regain credibility, you cannot get on top of inflation expectations."

El-Erian said the country is in a period of of stagflation, with a risk of persistent inflation that ends up tipping the economy into a recession.

"We're now in a period of stagflation, meaning lower growth and higher inflation. The darkest period is that inflation persists, heads to 9%, people start worrying that it's gonna go to 10% and next thing you know, we end up in a recession. And that would be tragic if that were to happen," he said.

"Because again, it is the most vulnerable segments of the population that get hit hard," he continued. "What's the best is that the Fed regains control of the inflation narrative, and we have what's called a soft landing: Inflation comes down without us sacrificing growth too much. Unfortunately, the balance of risks is tilted in the negative way right now."

But El-Erian said the nation does have a strong labor market, "and that's what's keeping us away from a recession right now.

"That's why recession is a risk scenario, not a baseline," he said. "The one bad thing about our labor market is that we don't have enough labor force participation. We don't have enough workers. We have twice as many jobs that are open that there are workers, and what we need is more workers entering the labor force. That would help tremendously with our economic outlook."

El-Erian lamented things could've been handled differently.

"It started mainly external, exogenous, if you like, things that we imported," he said of inflation. "But then the Federal Reserve did not react. It mischaracterized what inflation is and it fell behind. And the lessons of history is, once you fall behind, you lose the ability of the first best response. You end up in this awful situation that we're in today, where you need to make a choice. Do you slam on the brakes hard to control inflation and risk of recession? Or do you just tap on the brakes and risk inflation lasting much longer than it should?

"What makes this very frustrating is it was partially avoidable," he said. "This is going to have enormous economic, social — it hits the poor, particularly hard — institutional and political consequences. And most of it could have been avoided, had early actions been taken."

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