The United States is grappling with the highest levels of inflation in over thirty years. The Consumer Price Index (CPI) numbers released lately showed that prices rose 6.2 percent in October compared with the same time last year. With the emergence of the new coronavirus variant Omicron, policymakers and financial markets are worried that the economy could get even worse.
Mohamed El-Erian, the chief economic adviser for financial services firm Allianz, warned that the Omicron variant could lead to a 1970s-style “stagflation.” This is because Omicron has the potential to escalate record inflationary pressures, worsen supply chain issues, and unsettle the markets.
As the holiday season gets underway, the imposition of travel restrictions around the world is likely to drive consumer and corporate confidence to record lows. The situation could worsen if the new variant leads to further lockdowns that would pressure the already clogged supply chains and wreck any form of economic recovery.
“The marketplace is worried about two things: one, that yet another variant of COVID is going to hit them hard. We travel less. We go out to restaurants less, and we may have additional restrictions that are imposed on us. That’s issue number one… And issue number two, the marketplace is worried also that this will cause more inflation, that the supply chain will be disrupted even more… Those two things together: lower growth, high inflation are stagflation, and that’s what the market is worried about right now,” El-Erian told Fox News.
The Allianz economic advisor also believes that the possibility of inflation carrying over into 2022 is very likely. He wants measures to tackle inflation to be implemented soon because “it can, by itself, derail our economic recovery.”
El-Erian appealed to Jerome Powell to give utmost importance to controlling inflation. Biden nominated Powell for a second term as Chair of the Federal Reserve.
Powell believes inflation is transitory and has placed almost complete blame on the pandemic. However, El-Erian argues that inflation is not transitory and that it is time for a change of policy at the Fed.
“The worst thing that can happen is that in addition to the supply disruption, which they can’t do anything about, in addition to labor shortages, they destabilize our expectations and we change behavior even faster,” he said. This will prompt companies to quickly raise prices and make wage earners demand higher incomes, leading to an inflationary cycle.
Currently, El-Erian doesn’t see any problem with the demand side. Companies have plenty of capital and retail sales remain strong. The issue is with the supply side. If it is not addressed, it will impair the demand side. Supply disruptions and inflation are the two pressing issues that need attention, he concluded.
The last time the U.S. experienced stagflation was in the 1970s when Jimmy Carter was president. Rising unemployment, lower economic growth, and surging energy costs triggered by the Arab nations banning oil supply to the United States saw Carter serve only one term as president.