Larry Summers, who served as treasury secretary under President Bill Clinton and director of the National Economic Council under President Barack Obama, has issued a stark warning that inflation, rather than “excessive slack” in the economy as it bounces back from the pandemic recession, has now become the chief risk.
Summers penned an op-ed in The Washington Post on May 24, 2021 in which said that “even six months ago, it was reasonable to regard slow growth, high unemployment, and deflationary pressures as the predominant risk to the economy.”
But the recent stream of economic data, including a sharp rise in the consumer price index, record-high levels of job openings, business hiring difficulties, growing wages, and an economy growing at its fastest pace in decades, strongly suggest that inflation is looming ever larger as the key risk, he argued.
“Now, the primary risk to the U.S. economy is overheating—and inflation,” he wrote.
“This is not just conjecture,” Summers wrote. “The consumer price index rose at a 7.5 percent annual rate in the first quarter, and inflation expectations jumped at the fastest rate since inflation indexed bonds were introduced a generation ago. Already, consumer prices have risen almost as much as the Fed predicted for the whole year.”
Inflationary pressures are growing due to a demand boost fueled by some $2.5 trillion in savings households have built up during the pandemic, trillions of dollars in federal fiscal stimulus, frothy equity, and real estate markets, and the Federal Reserve’s asset purchasing program and commitment to keeping rates near zero into 2024, he said.
While crediting the “aggressive” COVID-19 containment policies and “strong” fiscal and monetary policies for helping the U.S. economy recover faster than other industrial nations from the pandemic lows, Summers cautioned that the newly emerging conditions, including labor shortages and projections that suggest unemployment could fall below four percent over the next 12 months, “require new approaches” from policymakers to sidestep a sharp economic contraction.
BY TOM OZIMEK