After Decline from Current Levels, Expect 4% for some Time, El-Erian Says

Supply Chain Digest Says...   These volume and rate declines come in the so-call peak season, when usually those metrics are moving much higher. What do you say? Click here to send us your comments   Click here to see reader feedback

Inflation in the US will continue decline for a while, but is likely to get stuck at levels that cause economic and other troubles, with supply chain factors playing a key role in inflation’s trajectory.

That according to well-known economist Mohamed El-Erian, president of Queens’ College at the University of Cambridge and frequent commentator on economic and financial issues.

His comments came during an interview this week with CNBC.

“We may have an issue where inflation gets stuck at around 4%,” El-Erian said, citing a level price increases that is double the Federal Reserve Bank’s target inflation rate.

4% inflation would also push wage rate much higher than in normal inflation times, raises which in turn drives higher costs for businesses and then still higher price increases to deal with rising costs for labor.

El-Erian posits that the higher level of inflation we will continue to see is driven by a “profound economic and financial shift” that isn’t “temporary or quickly reversible.”

And that’s where the supply chain comes in.

“You cannot rewire supply chains overnight,” El-Erian added, citing continued disruptions for many goods made in China, which fuels inflation from a lack of supply. But taming disruptions by moving production out of China often results in higher operating costs and therefore prices.

The transition away from fossil fuels and towards clean energy is also likely to raise costs for business and consumers for some time, El-Erian noted.

All this puts the Federal Reserve in a tough spot, El-Erian says, trying to stem still rampant inflation without pushing the economy into a recession.

Major price declines have already been seen in some freight markets, helping the Fed fight the inflation battle – but also a sign of economic weakness.

(See More Below)

For example, the weekly Shanghai Containerized Freight Index, which measures shipping prices out of China, recently dropped to $1,443, about one-third the level it reached in early June.

Meanwhile, US truckload freight board DAT Solutions says loads posted to its exchange are down about 52% year-over-year in October, sending average rates low by nearly 16% from last year.

These volume and rate declines come in the so-call peak season, when usually those metrics are moving much higher.

However, freight rates in many cases remain a bit above pre-pandemic levels even after the steep declines seen this year.

The Federal Reserve has already has raised interest rates six times this year to slow price hikes, doing so while also dealing with slowing economic growth and the risk of financial instability - something El-Erian calls a “trilemma.”

He believes that the US economy could still avoid a recession or experience only a mild downturn, benefitting from a still strong labor market and steady consumer spending – but a significant recession could still be in the cards.

Any reaction to El-Erian's comments? Let us know your thoughts at the Feedback section below.