- Inflation will drop sharply, but prices won't get back to the Fed's 2% target soon, Mohamed El-Erian said.
- The top economist pointed to inflationary pressures emerging across the global economy.
The economy will soon see a sharp drop in inflation – but that still won't be enough to return it to the central bank's target, according to top economist Mohamed El-Erian.
The Allianz chief economic advisor pointed to rosier economic outlooks on Wall Street, with Goldman Sachs among big firms recently predicting sharp disinflation and limited recession odds in 2024.
The risk of a recession is smaller than it was a year ago, El-Erian said previously. Inflation is also likely to cool even further – but not as much as markets or the Federal Reserve may be hoping, he warned.
"I do think we're going to get more disinflation at the headline level, and it's going to be quite sharp disinflation. I would disagree with them on the notion that core is headed to 2%. I suspect core for the next couple of years is going to be more around 3% ... We have some real things on the supply side that are going to play out over a number of years," El-Erian said in an interview with Bloomberg on Thursday.
He pointed to various shifts that could keep prices elevated over the long-run, such as cracks forming in the global economy, lingering supply-chain disruptions from the pandemic, and companies transitioning to green energy.
"All of that is inflationary. That's not going to go away anytime soon," El-Erian.
Prices have cooled significantly from highs last summer, but remain well-above the Fed's long-run targets. Headline inflation accelerated 3.7% year-per-year in September, slightly above the expected 3.6% clip. Meanwhile, core inflation accelerated 4.1% year-per-year, in-line with economists' forecasts.
All that points to a still-hot economy, despite the Fed raising interest rates aggressively since March 2022. Central bankers still have "more work" to do to lower inflation, Minneapolis Fed President Neel Kashkari said this week, suggesting more rate hikes could be in order, and Fed Chair Powell said in remarks on Thursday that the Fed isn't confident it has done enough to declare mission accomplished.
Investors now have their eye on the upcoming October Consumer Price Index report, which the Bureau of Labor Statistics is set to roll out next Tuesday. Headline inflation is expected to accelerate 3.28% year-per-year, while core inflation is expected to remain mostly level at 4.16%, according to the Cleveland Fed's Inflation Nowcast.