El-Erian: Interest rates, inflation moving in right direction, but lower prices 'not going to happen'

A prominent economist and educator is warning that Americans squeezed by the highest inflation rates in four decades are unlikely to see prices come down in the future.

Allianz chief economic adviser Mohamed El-Erian said Sunday that while inflation is cooling, what that means is the rate of price increases has slowed. It does not mean, he explained on CBS' "Face the Nation," that prices will eventually decrease to levels seen before inflation spiked in 2022 in the aftermath of the COVID-19 pandemic. 

"Well, we know the Federal Reserve is meeting later this week, may move on interest rates again, since inflation is around or getting close to that 2% target, but for average people, they see housing prices are high. They see grocery prices are still high. Where's the scenario where those prices actually come down?" asked host Margaret Brennan. 

"Yeah, and that's what everybody's expecting, but it's not going to happen." El-Erian replied.

WHY ARE CONSUMERS PESSIMISTIC ABOUT THE ECONOMY WHILE INFLATION IS COOLING?

"Look, the good news is, interest rates will continue to come down. The good news is, inflation, which is the rate of increase of the cost of living, will come down. But it's very hard to bring down prices, and that's one political problem, is when you tell people inflation is coming down, in their head, they think prices are coming down, not the rate of increase of prices," he explained. 

"So it's a misunderstanding, unfortunately, but you've got to be careful what you wish for, because if prices come down significantly, we are then in something much worse economically." 

FED'S FAVORED INFLATION GAUGE SHOWED PRICE GROWTH CONTINUED TO SLOW IN SEPTEMBER

Inflation surged to a 40-year high of 9.1% on an annual basis in June 2022 in the wake of pandemic-related supply chain disruptions and an influx of federal spending on relief programs and other initiatives. Though it has since ebbed to 2.4% in September and the labor market has remained solid amid the Federal Reserve hiking interest rates to slow the pace of inflation, prices are still about 20% higher than they were four years ago.

Inflation and the economy remain top issues for voters who will cast their ballots for the next president of the United States on Tuesday. Both Democratic candidate Vice President Harris and Republican former President Trump have put forward economic plans they claim will relieve inflationary pressures on families and stimulate economic growth. 

Harris has called for new government spending in the form of investments in small businesses and tax credits for families with children, while Trump has promised to cut regulations on energy production and raise tariffs to pay down the national debt.

US ECONOMY ADDED 12K JOBS IN OCTOBER, WELL BELOW ECONOMISTS' EXPECTATIONS

El-Erian said that even though prices remain higher than they were four years ago and the October jobs report fell well below expectations, the economy overall is in good shape.

"So most of the report, as you pointed out, was distorted in a really important manner, by the strikes, by the hurricanes," he said. 

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"The bottom line, Margaret, is we have an economy that has been growing robustly. Inflation is coming down, and the main challenge for the next administration is not just to maintain what is called economic exceptionalism, because we are outperforming all other advanced economies, but also to continue to reposition it for the engines of tomorrow's prosperity. And that's absolutely critical."

Fox Business' Eric Revell contributed to this report.