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- Inflation looks to be stuck above the Fed's target rate, top economist Mohamed El-Erian said.
- December inflation accelerated more than expected, to 3.4% on an annual basis.
- If the Fed lowers inflation to 2% too quickly, it risks "crushing" the economy, El-Erian has warned.
The Federal Reserve's inflation fight has hit a wall, and central bankers can't lower prices in the economy any further without causing damage, according to top economist Mohamed El-Erian.
The former PIMCO CEO and Allianz chief economic adviser pointed to the recent December inflation report, which showed prices rose 3.4% year-over-year. That's a faster pace than what was recorded in November, when prices grew just 3.1%, according to the Bureau of Labor Statistics.
El-Erian warned last year that inflation would likely get stuck around the 3%-4% mark, thanks to persistent pressures in the economy that will push prices higher, he said. His views have been contrary to other market commentators, who have forecasted inflation will drop to 2% by the end of this year.
"It's not [disinflation]. We're going to see and already are seeing cost push pressures in the pipeline," El-Erian said in an interview with Bloomberg on Friday. "I suspect that we will see inflation at the CPI level get stuck at 3%.
El-Erian pointed in particular to shipping disruptions in the Red Sea. That crisis could stoke further inflation by raising costs of key inflation inputs and disrupting supplies of goods and the flow of key energy commodities.
The US job market also remains resilient, something economists have warned is inherently inflationary. A tight labor market has boosted workers' wages, which can spark a wage-price spiral, a situation where wages and prices propel one another higher.
That puts central bankers in a tough situation, having raised interest rates aggressively over the past year to rein in high prices.
Markets are betting on ambitious rate cuts this year, but cutting rates too soon risks letting inflation flare up again, which could hit the Fed's credibility and make it even harder for central bankers to declare mission accomplished, El-Erian warned.
Given the circumstances, Fed officials now have two options: accept that inflation will remain around 3% over the near-term, or try to aggressively reduce inflation quickly, which could end up "crushing" the US economy, El-Erian said previously. Higher interest rates threaten to overtighten financial conditions and spark a downturn, with the New York Fed now pricing in a 63% chance of a recession this year.
"But this notion that immaculate disinflation is going to continue, is something I find very hard to reconcile with actual data," El-Erian said.
Other commentators on Wall Street have warned of the possibility of resurgent inflation as price pressures in the economy linger. Markets, though, are still bullish that inflation will fall close to the Fed's long-run target, with 1-year inflation expectations cooling to 2.4% in January, according to Cleveland Fed data.