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The Federal Reserve won’t be able to get US inflation down to its 2% target without “crushing the economy,” economist Mohamed El-Erian warned on Friday, but he said the central bank is unlikely to officially change that goal post.
“You need a higher stable inflation rate. Call it 3 to 4%,” El-Erian, the chairman of Gramercy Funds and a Bloomberg Opinion columnist, told Bloomberg Television. “I don’t think they can get CPI to 2% without crushing the economy, but that’s because 2% is not the right target.”
His comments come after government data this week showed US consumer prices, or CPI, rose 0.5% in January, the most in three months, and the annual inflation rate came in at a higher-than-expected 6.4% Following the report, a raft of Fed officials said the central bank may need to raise interest rates higher than expected to try and squelch persistent price pressures.
Calling the Fed “too data dependent,” El-Erian said supply-side developments, including an energy transition, the change in supply chains during the pandemic, a tight labor market and shifting geopolitical issues, necessitate the higher target inflation rate.
“It’s right to take data into account but you’ve got to have a view of where you’re going,” he said.
The problem now, El-Erian said, is that the Fed is stuck chasing an elusive 2% goal.
“You can’t change an inflation target when you’ve missed it in such a big way,” he said. He’s previously cautioned that changing the target would be a hit to the Fed’s credibility.
When asked on Friday if the Fed could “tolerate” higher inflation, El-Erian said that is “where I hope to go.”
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