Mohamed El-Erian: Consumers can no longer absorb price increases like during Covid

[Woman shopping at a convenience store and checking her receipt]
Hispanolistic

Allianz chief economic advisor Mohamed El-Erian warned that companies are now unable to pass on inflation costs onto consumers, as they have been doing since the pandemic began.

“Consumers are saying no more. We can’t take anymore,” El-Erian, who is also president of Queens’ College at Cambridge, explained in an interview with CNBC, highlighting that unlike during Covid, when stimulus checks helped absorb price shocks, today’s consumers lack that financial cushion.

The impact is particularly severe for lower-income consumers who are “living at the edge” and “running down whatever cash balances they have,” he said. While consumer spending recently increased by 0.3% according to Bank of America data, El-Erian suggested this trend may soon reverse as cash reserves deplete. Meanwhile, credit card debt, car loan debt, and related delinquencies are all rising [https://seekingalpha.com/news/4483202-us-household-debt-continues-to-climb-as-mortgages-student-loan-pressure-mount], creating what he described as a liability side that is “flashing yellow.”

“What we’re learning is that the final impact on the consumer is much less than people expected,” he said.

This economic reality is creating an unusual market environment where “risk on and risk off are rewarding investors” simultaneously, with equities and credit spreads near record levels while traditional safe havens like gold are also at record highs, he added.

The labor market appears “much weaker than they expected,” which combined with better-than-anticipated inflation data should prompt Federal Reserve action. “If the Fed is truly data dependent, the question should be why not 50?” El-Erian said, suggesting a significant interest rate cut might be warranted rather than the more modest reduction markets have anticipated.

Looking further ahead, El-Erian expressed optimism about long-term productivity gains.

“I’m very optimistic as to what’s going to happen to productivity in a few years. I really do believe in the AI positive shock, life sciences, robotics, those are all productivity enhancing,” he said, while cautioning, “We just have to get through the next year or two.”

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