MW Higher oil prices will push U.S. inflation rate to 3% this year, El-Erian says

By Greg Robb

Iran conflict to upend Fed's progress to its 2% target

Mohamed El-Erian listens during a discussion about the global economy at the IMF.

Higher prices will push inflation upward in 2025, limiting the Federal Reserve's ability to cushion the soft U.S. labor market, said former Pimco CEO Mohamed El-Erian.

Inflation will average about 3% in 2026, above the 2.6% average last year, El-Erian said in an interview Monday on CNBC. That's well above the Fed's 2% target.

For months, Fed officials have been forecasting that inflation will improve starting in the second half of the year as the impact of President Donald Trump's tariffs begin to wane. The central bank signaled it would likely stay on hold for a while, but then would be able to cut interest rates twice before the end of the year. But that was before the conflict in Iran and related spike in oil prices (CL00).

With inflation moving in the wrong direction, the Federal Reserve will stay on the sidelines and "wait and see" how the economy evolves, El-Erian said.

"No one wants to repeat the mistake of the 2021 transitory inflation call," he noted, referring to the Fed's decision to keep rates low even though inflation was rising. At the time, Fed officials believed the elevated inflation was a temporary side effect of pandemic-related supply shocks.

Last Friday's weak U.S. jobs report has raised fresh concerns about the outlook for the labor market, and has raised concerns about "stagflation" - a dynamic coupling an economic slowdown and higher inflation at the same time.

But Fed officials will be limited in their ability to lower rates further to help revive the economy, given that inflation remains above the central bank's target and high oil prices will likely only make it worse.

El-Erian said he wasn't expecting a recession this year, with higher gas prices pushing down GDP growth by only 0.5% this year.

For economists, the most important question is how long oil prices will remain elevated. Brent crude futures (BRN00), the global benchmark for the international oil market, have jumped 41% over the last six days.

Ethan Harris, former top economist at BofA Securities, said the Fed will look to see if companies start passing higher energy costs to consumers. On the other hand, the Fed will watch to see if there is a sharp drop in consumer confidence as there was at the start of the first Gulf War in 1990.

"I think the economy is vulnerable on both fronts," Harris said in a post on Linkedin.

El-Erian said there was a 50% chance that the crisis lasts longer than the two- to three-week period that seems to be the market consensus. "It is weeks and months, not days," he said.

"We seem to have forgotten the lesson of COVID - that when you impose a sudden stop on supply chains, things are in the wrong place when you want to start them again," he added.

If there is a sustained increase in oil prices, Michael Feroli, chief U.S. economist at J.P. Morgan, thinks the Fed will eventually lower interest rates because the economy will slow markedly.

A sharp reduction in demand as consumers' purchasing power plunges from higher gas prices would put downward pressure on core prices.

"Given that we are into year six of meaningfully above-target inflation, Fed officials may be slower than otherwise to embrace a dovish stance in this instance," Feroli said in a research note. "But provided longer-term inflation expectations remain sufficiently anchored, we would look for a pivot to easing in this case."

Andrew Hollenhorst, chief U.S. economist at Citi, said his base case is still 75 basis points in rate cuts this year.

"That looks increasingly justified by weak labor-market data. But whether or not those cuts materialize also depends on the path of oil prices," he said in a note to clients.

Michael Gapen, chief U.S. economist at Morgan Stanley, said the U.S. strikes on Iran and their effects on commodity prices could mean the Fed eases later than the 25-basis-point cuts in June and September that it currently expects.

-Greg Robb

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March 09, 2026 13:14 ET (17:14 GMT)

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