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Economist and Allianz Chief Economic Adviser Mohamed El-Erian discussed on “Granthshala News Sunday” what investors can expect from the market given the circumstances of inflation, workforce shortages and port constraints.

Host Chris Wallace asked how the holiday season would affect demand inflation and supply.

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“That’s why I’m sad to say – that’s what I expect – things will get worse before they get better,” the economist said on Sunday afternoon.

“We’re going to have a further shortage of goods. We’re going to have higher prices. Inflation will be around four to five percent. And these things will take time to sort out, Chris. These things can’t happen overnight. To be solved. It was years in the making and then COVID quickly progressed and everything accelerated and now there we are.

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Wallace pressed El-Erian, “What about the markets?”

“I’m a little concerned that in this wonderful world we’re living in with low volatility, anything that is going up may be closed with high volatility. But a lot depends on behavior change.”

“If I were an investor, I would know that I am riding a huge liquidity wave for the Fed. But I will remember that the waves break at some point. So I would be very watchful.”

El-Erian also responded to the claim that the inflation the US is facing is a “high-grade problem”. The controversy erupted after White House Chief of Staff Ron Klein endorsed the inflation and scarcity reduction approach.

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El-Erian said some parts were high-grade problems because of wage incentives and wage increases due to demand from workers. Other parts, such as the felt on the gas pump, weren’t a high-end problem.

“It’s not a high-grade problem, but there are elements that are high-grade. One, the huge demand for labor. So wages are starting to go up and it’s starting to grow meaningfully. Second, the reason is so much. “Inflation is partly due to too much demand. That’s too much purchasing power in the economy. That’s a good thing… But part of this inflation is good. Part of inflation is bad inflation.”

“We should expect more strikes ahead because workers now have more bargaining power. Why is this happening? Part of it is the additional demand for people hired quickly because demand has returned. But one of the Part is change behavior. We think we can now negotiate a higher wage without losing our jobs. We think we can move from one job to another and get a sign-up bonus. And some people Don’t want to return to the labor force. They have changed their minds about work-life balance.”

Al-Arian also disagreed with the view pushed by the Biden administration that inflation was temporary.

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“I don’t agree that it’s fleeting, Chris. There’s a part of it that’s transitory, it’s related to COVID, but there are things going on that are fundamentally deeper than that. They involve a change in behavior. So We must look forward to another year, at least of high and sustained inflation.”

El-Erian also provided a four-point plan that the government should follow to address the problem.

First, El-Erian said the Fed should “relax” the monetary stimulus it continues to pump into the economy in response to COVID. “It made sense at the height of the emergency. It doesn’t make sense anymore, so they should lower the pedal to the metal monetary stimulus,” he said.

The second, he said, “includes infrastructure and human investments” to bring back productivity.

Third, “we have to take extreme financial risk very seriously because if we are not careful what is going to happen inflation, as it persists, will disrupt financial markets which will then weaken the economy.”

“And finally, we have to bring more people into the labor force. These things are possible from an engineering point of view. It takes political will to implement them.”