Mohamed Mohamed El-Erian, chief economist of Allianz, on Monday refuted the Fed's view that inflation was temporary, saying that "temporary" could mean a year or two and that Fed Chairman Colin Powell's firm stance on the issue could complicate his re-election prospects.
"when the Fed starts to say it's not a few months or a few quarters for now, it could be a year or two," Erian said. At this point, the short-lived concept becomes meaningless. The risk is that inflation will seep into the system. "
Mr Erian also discussed the future of Mr Powell as chairman of the Federal Reserve, who has long believed that inflationary pressures are temporary.
"what Chairman Powell has done is that he has nailed himself to the core of temporary inflation again and again," he said. It has become a belief-- an absolute belief-- and he keeps repeating it. The risk for him is that his appointment process could be complicated. "
However, Erian clarified that Powell is likely to be re-elected in February next year before the US economy judges whether inflation is really temporary.
The Allianz chief economist pointed out once again that there is a lack of understanding of what inflation is and how it spreads throughout the economy. "those of us who have experienced an inflationary period are witnessing what I call cost-driven and demand-driven inflation," he said. I would like to clarify one point: I do not think stagflation is a destination for the US economy. If we are not careful, it may be part of the journey. "