Mohamed El-Erian at the London AIM Summit

Mohamed El-Erian at the London AIM Summit

The AIM London Edition was held on May 16/17, 2022, convening industry experts, market movers and global thought leaders. The conference included in-depth panel discussions, keynotes and fireside chats covering the latest trends, opportunities and developments in the world of crypto and alternative investment.

It was a pleasure to meet and to spend time with Mohamed El-Erian, Chair of Gramercy Fund Management and Chief Economic Advisor at Allianz. He is also President of Queens’ College, Cambridge.

Surging inflation raised many questions at the conference. In the US consumer inflation jumped nearly 8% in February over last year – the sharpest spike since 1982 and these figures did not include the oil and gas-price increases following Russia’s invasion of Ukraine.

One point of reference is the Oil Shock of 1973-1974. The complicated macroeconomic environment of the early 1970s collided with an oil embargo by Arab producers leading, in turn, to high inflation and recession i.e. stagflation for oil-importing developed economies.

Naturally El-Erian’s views were eagerly sought on this matter and particularly on whether current conditions can also lead to recession.

He pointed out that stagflation is an extraordinary challenge because it brings into conflict the maintenance of price stability and the maximisation of employment. These are the two central policy objectives for most central banks, most importantly the Federal Reserve.

As a result, the Fed and other central banks are going to have to make a very difficult choices: either continue raising rates to fight inflation at the risk of throwing the economy into a recession or ignore rising consumer prices and hope that a growth slowdown will bring inflation back to target levels.

The good news is that the consumer may be strong enough to withstand a stagflationary environment due to the significant savings that were built up during the pandemic amid fiscal stimulus he stated.

However, El-Erian broke with Wall Street’s consistent predictions of an impending recession, telling Bloomberg that a full-blown recession for the U.S. economy isn’t guaranteed. But stagflation, he said, is now “unavoidable,” and stock market investors have yet to price in the “significant slowdown in growth” to come.

“We’ve seen growth coming down, and we’re seeing inflation remaining high,” El-Erian said. “The Fed is finally catching up to developments on the ground, but it still has some way to go. It needs a lot of luck at this point” he added.

He went on to argue that the current stagflation predicament was preventable had the Fed raised interest rates while the economy was still recovering from the pandemic instead of being overly attached to its “transitory” characterisation of inflation. Now the central bank is facing a nightmare situation as it attempts to raise interest rates into a growth slowdown.

Even former Fed Chair Ben Bernanke admitted in a New York Times interview last week that the Federal Reserve’s delayed response to rising consumer prices “was a mistake” that would lead to a period of stagflation.

As a recent Bloomberg report put it, “The world economy has a decent shot at escaping a full re-run of 1970s-style stagflation – and that’s about as far as the good news goes.”