Mohamed El-Erian, a prominent economist and Chief Economic Advisor at Allianz, stated that the conflict involving Iran has heightened the probability of a U.S. recession, though it is not the only risk he is monitoring. The former PIMCO Chief Investment Officer said in a Tuesday interview that the likelihood of an economic downturn in the United States is growing, driven by surging oil prices which could trigger a potential inflationary spiral. El-Erian indicated that his assessment of the U.S. entering a recession has increased from approximately 25% to 35%. He noted that this rise is primarily due to spillover effects from the U.S.-Iran conflict but added that another factor is also influencing his outlook. Rising oil prices leading to a spiral of inflation could cause a demand shock. The conflict has already driven up oil prices, with Brent crude trading near $100 per barrel for over a week. El-Erian suggested that higher oil prices risk making inflation a structural issue for the U.S. economy, referring to the widespread use of oil in the economy and broader supply chain disruptions caused by the war. "The first phase is high inflation, which erodes purchasing power and increases business costs. The second phase is slowing economic growth and rising unemployment," El-Erian explained while outlining his pessimistic forecast, adding that he views this scenario as the greatest risk to the economy. The risk of a "financial accident" is also increasing. El-Erian stated that heightened inflation could interact with various "fragilities" in financial markets, such as the recent surge in redemption requests in the private credit sector, weak demand for global government bonds, and elevated equity market valuations. "A significant financial accident would tighten financial conditions, and people would lose access to credit. The result would ultimately be a demand shock," he said. "The longer the conflict persists, the higher the probability of a recession," he further commented regarding his recession prediction. For weeks, markets have been concerned about the impact of rising oil prices. Investors are currently experiencing a third consecutive week of rising crude prices, with no end in sight to the conflict. Concerns are mounting that higher oil prices will push up inflation, burden consumers, and lead more Americans to cut back on spending. El-Erian said the outcome could be a "demand shock," causing significant harm to businesses, which would in turn lead to reduced spending and increased unemployment. Furthermore, such a shock could coincide with a period when U.S. economic growth and hiring activity have already begun to slow. In recent months, El-Erian has been more vocal about his views on various risks in markets and the economy. Beyond heightened inflation, he has also pointed to contagion risks in the private credit sector, which is receiving increased attention as investor worries about liquidity in that area grow and more asset management firms face redemption requests.