The Fed has no choice but to respond aggressively after the June inflation report and could raise rates by 100 basis points this month, Mohamed El-Erian says

• June's hot CPI reading of 9.1% will force the Fed to respond aggressively, Mohamed El-Erian said in the Financial Times.
• According to the top economist, a 1-percentage-point rise could be on the table for this month's meeting.

June's inflation reading came in at the highest level in 41 years, and that leaves the Federal Reserve no choice but to hike interest rates aggressively, opening the door to a potential 100-basis-point increase this month, said top economist Mohamed El-Erian.

In a Wednesday column for the Financial Times, he said the 9.1% jump in the Consumer Price Index will further erode the central bank's credibility after policymakers were previously so adamant that high prices were transitory.

"The Fed now has no choice but to respond aggressively," wrote El-Erian, who is an economic adviser to Allianz and Gramercy. "It is sure to increase interest rates by 0.75 percentage points later this month and could well consider a 1 percentage point rise."

The Fed meets July 26-27. It has already increased rates by 25, 50 and 75 basis points in prior meetings this year, meaning a 100-basis-point hike would mark further acceleration in tightening.

But such a steep hike and the belated policy reaction heighten the risk of recession, he noted, especially as economic activity is slowing down already.

And while inflation is set to decline over the coming months, the CPI report showed price pressures are continuing to broaden, El-Erian added.

"As such, and especially if the Fed fails to get its act together quickly, it would be foolish to dismiss the chance of a third wave of inflationary pressures that would interrupt and reverse the downward movement of the next three months," El-Erian wrote.

As the high inflation reading pushes the Fed to be more aggressive, the implications will reverberate across other world economies and uncertainty will stick around.

The economist maintained that June's hot reading will add to the phenomenon of so-called "little fires everywhere," particularly in developing nations.

"Have no doubt: the latest inflation numbers are indicative of rough seas ahead, particularly for the most vulnerable segments of society in the US and around the globe," El-Erian said.