By Tom Ozimek
Allianz chief economic adviser Mohamed El-Erian said in an interview that the inflation problem in the United States will inevitably turn into a cost-of-living crisis as price pressures become broader, further erode the wage gains of many American households, and dent demand.
Wages have been on the rise as businesses boost pay to attract and retain badly-needed staff in the wake of the post-pandemic rebound in demand. But the higher pace of inflation has eroded those gains, pushing real wages—or those adjusted for inflation—into negative territory.
The average U.S. employee made $31.85 an hour in April, according to a May 6 report from the Bureau of Labor Statistics, which is a 5.5 percent increase from April of last year when the average was at $30.20 an hour. At the same time, consumer price data released on May 11 shows that the pace of inflation within the same period came in at 8.3 percent, which means that inflation effectively gave the average worker a pay cut of 2.8 percent.
In an interview on CNBC’s “Squawk Box” on May 11, El-Erian was asked about real wages declining in April and what the implications are for the economy of inflation outpacing wage gains and making products less affordable to American households.
“That’s when an inflation problem becomes also a growth problem. Why? Affordability. The extent to which high prices destroy demand,” the economist replied.
“It’s just a matter of time until we talk about a cost-of-living crisis—and this is what it is,” he added.
El-Erian said that most analysts were focused on the headline Consumer Price Index (CPI) data, released Wednesday, which showed inflation climbing at a slightly slower 8.3 percent over-the-year pace in April compared to an 8.5 percent peak in March.
But core inflation, which strips out the volatile categories of food and energy and is viewed by economists as a measure of underlying inflationary pressures, accelerated. Both on a year-over-year and on a month-over-month basis in April, core inflation picked up its pace to 6.2 percent and 0.6 percent, respectively. In particular, the monthly core inflation reading was twice as high as the 0.3 percent pace notched in March.
Not only did underlying price pressures rise in April even though the headline readings eased a little, inflation has seeped into more categories, becoming a more broad-based phenomenon.
“Look at the composition of inflation. This suggests there are many drivers now. This is no longer an issue about just the Ukraine war, this is a broad-based inflation process that the Fed has fallen behind in a major way,” El-Erian said.
Bankrate Chief Financial Analyst Greg McBride told The Epoch Times in an emailed statement that he also sees inflation as becoming more broad-based, and cautioned against interpreting the decline in headline CPI data as meaning that inflation has peaked and will now start to fall.
“The pace of price increases moderated, but not as much as expected. Excluding a decline in energy prices—which appears outdated by this point—the increases remain widespread,” McBride said. “With the annual rate ticking down from 8.5 percent to 8.3 percent, it can be tempting to say we’ve seen the peak, but we’ve also been head-faked before as was the case last August.”
El-Erian was asked in the interview whether the Fed would interpret Wednesday’s inflation data as reason to put a 75-basis-point rate hike back on the table after Fed Chair Jerome Powell said a series of 50-basis-point rises would be enough to tame surging prices.
“First, they’ve got to be more humble. They can’t take anything off the table,” he replied, saying that the Fed should avoid being too specific about the size of rate hikes under the current environment.
“You have to keep your options open,” he added.
His remarks come a day after Cleveland Fed President Loretta Mester said in an interview on Bloomberg Television that the Fed isn’t ruling out a 75-basis-point hike but that the current pace of 50-basis-point hikes “seems about right.”
“I think the pace we’re going right now seems about right to me. We’ll be able to get more information after we do a couple of those,” Mester told the outlet, adding that she wasn’t keeping anything off the table in the second half of the year.
“We’ve just got to get this inflation under control,” she added, describing it as “way too high.”
