Larry Summers Doubles Down On His Inflation Prediction
Larry Summers Doubles Down On His Inflation Prediction
But somehow becomes vaguer about exactly how this is going to happen and show up, but he wants the Fed to stop it in its track, goshdarnit. This is in a column appearing in the Washington Post, May 25, “The inflation risk is real.”
Well, he does start out by saying that the economic recovery from the pandemic is a good thing, as is of course the the receeding of the pandemic itself, with the US doing well compared to “other industrial countries.” The fiscal and monetary policies supporting this have so far been a good thing, blah blah blah. But now we must change course, especially the Fed, which Summers is still ticked off about not being appointed Chair of instead of Janet Yellen back when (both of his parents worked for the Philadelphia Fed, so, obviously he should have been put in charge of it, goshdarnit, quite aside from having Paul Samuelson and Kenneth Arrow as uncles!). It is not just ongoing easy monetary and fiscal policies involved here, but the “pentup demand” now roaring out that supposedly is going to race against supply responses for some long time into the future.
Oh, he does have some evidence. Indeed the rate of inflation has risen and to a level, 7.5% annual rate in the first quarter, and can quote various others who agree with him that inflation is in danger of getting seriously out of control, such as Warren Buffett, and can quote Jason Furman (who briefly co-blogged with some of us back on the old Maxspeak) that the fiscal stimulus is “too big for the moment.”
This all supposedly means that the Fed needs to step forward by “explicitly recognizing that that overheating and, not excessive slack, is the predominant near-term risk for the economy.” Furthermore, “policies toward workers should be aimed at the labor shortage that is our current reality” by ending extra unemployment benefits in September. Oh, while he is worried about too much fiscal stimulus, he nevertheless does recognize that expanding infrastructure would help expand future supply capability, so he does reasonably argue states should not use federal aid to cut taxes.
Getting back to the Fed, regarding which Summers thinks “Tightening is likely to be necessary,” it must be noted that the Fed from the beginning of the year, if not earlier (along with Treasury Secretary Yellen) has forecast an increase in the rate of inflation this year. It must be admitted that indeed the most recent price spike exceeds what was forecast, so this is the opening for Summers and those who agree with him to argue that inflation is indeed a real risk that calls for a change of policy, or at least of rhetoric in preparation to change policy. And this could happen, but how likely is it?
Here is where Summers seems to fall down. The people at the Fed, led as near as I can tell by the astute Jim Bullard, have argued that nearly all price increases we would see are temporary surges associated with pandemic-induced supply chain problems, with the global shipping issue at the top of the list with its now tripling of costs. A sign of this is the most dramatic price increases one hears about, such as for copper, have been overwhelmingly among raw materials and commodities rather than final consumer goods, although there certainly has been some passthrough for many of those. But even with those, some appear to have perhaps stopped rising, notably that headline maker, gasoline prices, which seem to have stopped rising after the freakout following the Colonial Pipeline shutdown that set off people waiting in lines a la 1979 (and getting on Fox News screaming about hyperinflation and blaming it on Biden).
Summers actually has very little to say specifically to offset the argument that most of this recent spike in prices most dramatically of inputs is not going to continue for all that much longer. He grants that some of this is “transitory,” but then invokes unspelled-out “variety of factors” that will keep demand rising faster than supply so that they “impact…inflation expectations on purchasing behavior.” The only specific sector he mentions is housing, where he says that rising housing prices have not shown up in official inflation data. He also claims that such expectations are showing up in interest rate changes, even though over on Econbrowser Menzie Chinn argues that if one accounts for liquidity and term premia, changes in 5-note and TIPS rates show basically no increase in inflation expectations at the 5-year time horizon, those still sitting at about 1.7%, still below the Fed’s target inflation rate.
Oh, he also invokes “Higher minimum wages, strengthening unions, increased employee benefits and strengthened regulations” as further exacerbating this inflationary surge, even though he says these “are all desirable.” But Congress failed to raise the minimum wage, and while Biden may be the most pro-union president since FDR and Truman, union membership remains very low and not expanding, as the vote on organizing at Amazon in Alabama shows. He really does not have much in the way of how the recent price hikes will keep on going up or even accelerate, rather than slow down or stop or even go back down in some cases for many of these inputs like copper and oil.
Obviously none of us know for sure on this, and indeed reports have it that the Fed is keeping a close eye on the price increases with rumblings even from Yellen that if inflation actually does stick or accelerate they will act to offset it. But from what I see, it remains that the vast majority of these price increases are likely to slow or even reverse as the supply bottlenecks gradually get loosened as the year proceeds. Summers seems to be mostly just waving his hands that they will continue, and the Bullard-Fed view that they will ease still looks to me to far more likely. But in the meantime, Summers gets to get a lot of attention, even if he is not Fed Chair.
You shall not crucify mankind upon a cross of exorbitant privilege,
How much inflation would need to occur if policy pursued a path towards higher median real wages? Regardless of how much inflation, then why would we care about inflation? Clearly creditors would care more than debtors. How do the numbers on that work out?
71/2% was the mortgage on my first home bought in 1973.
Inflation was a real problem, but it was still not the horror it is seems to be to some today.
Cost-Push Inflation vs. Demand-Pull Inflation: What’s the Difference? (investopedia.com)
Cost-Push Inflation vs. Demand-Pull Inflation: An Overview
There are four main drivers behind inflation. Among them are cost-push inflation, or the decrease in the aggregate supply of goods and services stemming from an increase in the cost of production, and demand-pull inflation, or the increase in aggregate demand, categorized by the four sections of the macroeconomy: households, business, governments, and foreign buyers. The two other contributing factors to inflation include an increase in the money supply of an economy and a decrease in the demand for money.
Inflation is the rate at which the general price level of goods and services rises. This, in turn, causes a drop in purchasing power. This is not to be confused with the change in the prices of individual goods and services, which rise and fall all the time. Inflation happens when prices rise across the economy to a certain degree…
…but all bets are off after a deep and prolonged economic shock leads to a recovery wherein significant structural changes are incorporated into a new economic model, whether reflexively or pragmatically if it is indeed possible to discern the difference.
We got rising oil, rising fracking, and Greenish New Dealism emerging in a revised spoke and hub transportation model with fewer hubs for most retail commerce while food service makes up the difference with the addition of vastly more spokes threatening an already shell shocked retail grocery war. Monetarism does not function all that well in times of economic peace, but is entirely pointless in times of economic war.
But you tell me over and over again my friend that you do not believe that we are on the eve of restructure. The math for inflation falls apart under condition of extreme structural readjustment, whether modeled or actual.