Economist Mohamed El-Erian: Rising Oil Prices Make Recession More Likely

Famed economist Mohamed El-Erian says the Iran war has led him to raise his odds of a US recession to 35%.

A US recession is becoming more likely as surging oil prices feed into inflationary pressures.

He warned that rising oil prices could trigger an inflationary spiral that would weaken demand, while also increasing the risk of a financial “accident” that could harm the broader economy, Jennifer Sor reported for Market Insider.

El-Erian, the former chief investment officer of PIMCO, told Business Insider that a US recession is becoming more likely as surging oil prices feed into inflationary pressures.

He said his estimate of recession risk has risen from about 25% to 35%, largely due to spillover effects from the US-Iran war, though he noted additional risks are also at play.

Higher oil prices can drive inflation, eroding purchasing power and raising costs for businesses, ultimately leading to weaker demand.

The conflict has already pushed Brent crude to around $100 a barrel for more than a week, raising concerns that inflation could become more entrenched in the US economy due to oil’s central role in production and supply chains.

“Phase one is higher inflation that eats away at people’s purchasing power and increases costs for businesses. Phase two is lower growth and higher unemployment,” El-Erian said, describing his downside scenario.

He also warned of rising risks of a “financial accident,” noting that elevated inflation could interact with existing vulnerabilities in markets, including stress in private credit, weakening demand for government bonds, and high equity valuations.

“You get a big financial accident, then that tightens financial conditions and people can’t get credit. As a result, you end up with a demand shock,” he said.