El-Erian says inflation won't peak for some time and the Fed might be forced to raise its target

Published Mon, Apr 18 202210:08 AM EDTUpdated Mon, Apr 18 20226:00 PM EDT

Inflation will not reach its peak anytime soon and the surging prices could force the Federal Reserve to raise its target, according to Mohamed El-Erian. "There's another inflationary impulse in the system ... It's coming from a very tight labor market. We cannot declare inflation over, especially core inflation," El-Erian, chief economic advisor at Allianz, told CNBC's " Squawk Box " on Monday. Prices that consumers pay for everyday items surged a whopping 8.5% in March , the highest levels since the early days of the Reagan administration. To combat inflation, the Fed has begun raising interest rates and is expected to continue doing so through the remainder of the year and into 2023. El-Erian, a Wall Street veteran who previously was CEO of investment giant Pimco, said the U.S. could see another spike in the consumer price index, or CPI, reading this year. "Short term, we are going to come off the 8.5% but we are not going to come off much," he said. "And we might have another leg up later in the year especially if the Fed doesn't get its act together and if the Fed doesn't control inflation expectations." Raising Fed's inflation target? The Fed's favorite inflation measure, the personal consumption expenditures price index, jumped to 5.4% in February from the same period in 2021, hitting its highest annual level since 1983. "Longer term, we are not going to get back to the Fed's 2% this year or next year. So the Fed is going to have a really difficult choice. It's only a matter of time when you hear people talking about the Fed changing its target," El-Erian said. Calls for raising the inflation target have been circling on Wall Street for a while, and Fed Chair Jerome Powell has thrown cold water on it before. Powell said much of the pressures are coming from Covid pandemic-specific factors, in particular escalated demand for goods over services that supply could not meet. "What would force them to change their target is the recognition that by being so late they can't get to their target and their credibility is threatened. And they would also worry that by hitting the brakes too hard, they might push this economy not just into a short-term recession but a long-term recession," El-Erian said. "They would be very tempted to raise their target from 2% to 3% as a way out. That's not going to be an easy way out and it's going to be incredibly controversial," he said.

Mohamed El-Erian

Olivia Michael | CNBC

Inflation will not reach its peak anytime soon and the surging prices could force the Federal Reserve to raise its target, according to Mohamed El-Erian.