El-Erian says worst of inflation behind us as June rate falls to 3.5%

Mohamed El-Erian said the worst of inflation is behind the US economy, as June's 3.5% reading — down 0.4 percentage point from May — supports the case that the Federal Reserve's tightening cycle has peaked.

"The worst of inflation is behind us," El-Erian, the Rene Kern professor at the Wharton School and chief economic advisor at Allianz, said on CNBC's "Squawk Box" on July 20.

June's consumer price index came in at 3.5%, still above the Fed's 2% target but marking the second consecutive monthly decline. Energy prices fell 5.7% from May, though they remain 15.7% higher year over year, with gasoline up 26.7% and fuel oil up 42.9%. The moderation has paused calls for further rate increases just days after new Fed Chair Kevin Warsh delivered his first congressional testimony on July 14.

The question now is whether the disinflation trend can survive the ongoing war in Iran, which keeps energy markets on edge. If energy prices resume their climb, inflation could re-accelerate, forcing the Fed back into tightening mode. If the trend holds, markets may begin pricing rate cuts as early as the next Fed meeting.

Warsh's First Test

In his July 14 testimony, Warsh said inflation was a "choice," arguing the Fed bears responsibility for proactively bringing it under control. That marks a shift from the Powell era's more data-dependent approach. Warsh also highlighted business investment as "the most striking feature of the economy right now," pointing to data center build-outs and the hardware and software needed to support them — a nod to the AI boom that El-Erian also addressed.

The last time the Fed faced a similar inflation trajectory was in 2023-2024, when rates were held at their peak for an extended period before the first cuts arrived. That cycle saw the S&P 500 rally more than 20% in the 12 months following the final hike, as lower rates boosted equity valuations.

The Iran Wild Card

The biggest risk to the inflation outlook remains the conflict in Iran. June energy prices, while down month over month, were up 15.7% year over year. Fuel oil surged 42.9% from a year earlier. Any escalation in the conflict could reverse the recent disinflation progress, keeping the Fed in a holding pattern. OIS markets will be watching the next inflation print for confirmation that the trend is durable.

For investors, El-Erian's call adds weight to the view that the Fed's next move is a cut, not a hike. That would support risk assets from equities to crypto, while pressuring the US dollar and bond yields. But the Iran conflict means the path is anything but certain.

This article is for informational purposes only and does not constitute investment advice.