Former Clinton and Obama economic advisor Larry Summers has been sounding the alarm about inflation for most of this year, pointing out that Joe Biden’s massive spending has created conditions for an inflation spike that could severely damage any recovery from the pandemic.
This has not made Summers a popular fellow in the West Wing of the White House, nor among Democrats in Congress. But the most recent inflation numbers, showing prices rising 5.4 percent compared to the same period last year, have set off alarm bells.
We were told that the inflation hitting the economy was transitory and would come back down soon. But month-to-month inflation rose a worrying 0.9 percent, belying the notion that the spike is only temporary.
Summers met with Biden yesterday and said in an interview afterward that he is even more concerned now than when he first sounded his alarm in February.
“These figures and labor market tightness and the behavior of housing markets and asset prices are all rising in a more concerning way than I worried about a few months ago,” he said in an interview on Tuesday. “This raises my degree of concern about an economic overheating scenario. There are huge uncertainties in the outlook, but I do believe the focus of concern right now should be on overheating.”
Biden’s people tried to put lipstick on the pig — not very convincingly:
“All of these data points need to be put into the context of an economy that is recovering rapidly as the U.S. is leading the world in terms of growth,” a senior administration official said of the latest inflation figures.
Another White House official said there’s nothing to see here. Move along.
“This was a hot inflation print but it’s consistent with our forecast,” the official said of the latest report. “You have a strong demand recovery and the supply side of the economy is recovering at a slower pace.”
Despite the dismissals, White House officials are nervously watching inflation data and hoping that their belief that increases will moderate eventually proves on target.
They also have their eyes on employment data, hoping for a spurt in job gains in the fall and for wage increases to outpace the pace of price hikes. The numbers were not good on that front last month as real average hourly earnings dropped 0.5 percent from May, according to the Labor Department, as the 0.3 percent rise in wages was more than wiped out by the 0.9 percent increase in prices.
It’s cross your fingers and pray for the White House. Fortunately for Biden, he has Fed chair Jerome Powell trying to calm markets.
Powell, a Republican who is in line to be renominated this year for another term as Fed chair, says the rise in inflation will be “transitory” and that interest rates can remain at historically low levels well into next year and perhaps beyond.
While some other central bank officials are pushing for rate hikes sooner to prevent a potentially damaging spiral in costs that would hammer consumers, Powell has delivered a consistent message of calm. He will appear before Congress in a pair of highly anticipated hearings beginning Wednesday before the House Financial Services Committee and before the Senate Banking Committee on Thursday.
Democrats are angry at Summers because he has warned of the danger of big spending while his party is trying to make a case that supercharged government spending is necessary and good. It’s popular with younger Democrats and minorities. And mothers love the proposed spending on daycare, child care, and other government goodies that were previously out of reach for much of the middle class.
But the support for big spending would disappear if double-digit inflation were to become a reality. Republicans are already positioning themselves to take advantage of an inflation spike and would benefit enormously in 2022 if it comes to pass.