Economy

Larry Summers sends inflation warning to White House: Dominant risk to economy is ‘overheating’

Read more at www.cnn.com

“Policymakers at the Fed and in the (White House) need to recognize that the risk of a Vietnam inflation scenario is now greater than the deflation risks on which they were originally focused,” former Treasury Secretary Lawrence Summers told CNN. “Whatever was the case a few months ago, it should now be clear that overheating — not excess slack — is the dominant economic risk facing the US over the next year or two.”

On the heels of a disappointing jobs report last week, the government reported consumer prices rose 4.2% in April over a year earlier, and 0.8% on a seasonally adjusted basis between March and April. Both figures exceeded earlier forecasts, just as the 266,000 April jobs gain fell far short of expectations.

The news came as Americans in the Southeast caused a fuel shortage by panic-buying gasoline in the days after a cyberattack caused the Colonial Pipeline to shut down. The pipeline, which supplies a large portion of the East Coast’s fuel, was restarted Wednesday afternoon.

Summers, a top economic adviser to former Presidents Barack Obama and Bill Clinton, warned earlier this year that Biden’s $1.9 trillion Covid relief bill might overstimulate and damage the economy by sparking excessive inflation. Biden aides responded that, while they were monitoring inflation risks, the danger of spending too little to recover from the effects of the pandemic exceeded the risks of spending too much.

The White House continued to publicly downplay inflation concerns on Wednesday, saying the new data reflects pent-up consumer demand that some suppliers cannot immediately meet. Press secretary Jen Psaki said that administration economists, like those at the Federal Reserve, have anticipated short-term bursts of inflation that will recede as the economy returns to normal.

Psaki also noted that price increases for goods such as airline tickets and hotels, as Americans resume traveling, have still left prices below pre-pandemic levels. A shortage of semiconductor chips, which has slowed new car production, helped drive up the cost of used cars.

But financial markets fell in response to Wednesday’s data, and Summers found vindication for his warning.

“My concerns about overheating have grown substantially over the last several months,” he said.

Though Federal Reserve Chairman Jerome Powell expresses confidence the potential risk is manageable, Summers fears the central bank’s current approach makes it “unlikely to be able to engineer a soft landing if inflation accelerates.”

He urged the administration to take three specific steps. One is to publicly express greater concern about inflation as a way of tempering expectations of future inflation, which themselves can fuel inflationary economic behavior. A second is to signal that enhanced federal unemployment benefits, which critics have said are discouraging some Americans from returning to work, will not be extended after they expire in September. A third is to slow the rush to distribute Covid relief funds.

“Wherever possible, they should be trying to defer spending rather get it out the door as soon as possible,” Summers said.

He worries less about the $4 trillion that President Joe Biden has proposed for infrastructure, education and aid to struggling families because so much of that spending will be spread out over years.

Biden has shown no inclination to defer current spending. This week, his aides invited states and local governments to request their share of $350 billion in aid under the American Rescue Plan, saying they could expect to receive the money within two weeks.

Administration economists remain confident in their “go big” approach, cautioning against overreacting to a single month’s disappointing numbers. While they monitor conditions for signs of lasting problems, they continue to find encouragement in employment and output growth.

They acknowledge, however, that coming back from a once-in-a-century pandemic creates a heightened level of unpredictability.

“We need to be cautious and humble,” one administration official said. “We haven’t been through this before. The path to getting between here and normalized is going to be a bumpy and uncertain one.”

Read more at www.cnn.com

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