Larry Summers, the former Treasury Secretary, has expressed concerns about inflation as we head into the new year. In an interview with Bloomberg, Summers stated that inflation remains the most important risk in the year ahead.
Summers acknowledged that the outcome regarding inflation aligns more closely with the prediction made by “Team Transitory.” Led by Nobel laureate Paul Krugman, this team argued that the inflationary pressure experienced since the aftermath of the COVID-19 pandemic was transitory and caused by supply chain challenges.
Summers never believed that the United States would become a 7% or 8% inflation country. He believed that the bottlenecks that led to the spike in inflation would eventually subside, thus reducing inflation. However, Summers also expressed doubts about the Federal Reserve’s inflation target, stating that he does not view the 2% target as a prudent number.
The former Treasury official highlighted several factors that contribute to his uncertainty about inflation. These include the 5.2% wage increase announced by the federal government for 2024, tight labor markets, and the inflection seen in house prices.
Summers emphasized that the economy is in an ambiguous situation. The anticipated hard landing did not occur in 2023, which was not surprising given that neutral rates have risen, making monetary policy less contractionary than expected.
Looking ahead, Summers warned of potential risks that the market may be underestimating. He expressed skepticism about the progress that will be made on inflation and emphasized that both inflation and recession are significant risks in the coming year.
Summers found it surprising that some put more emphasis on the risk of a recession, given the recent easing of financial conditions. He pointed out that the stock market has rebounded, house prices are rising, and long-term rates, including mortgage rates, have significantly decreased.
Despite some easing, consumer price inflation continues to trend above the Federal Reserve’s 2% target. The iShares TIPS Bond ETF (TIP), which tracks an index of inflation-protected U.S. Treasury bonds, ended Friday’s session down 0.12%, reflecting ongoing concerns about inflation.
In conclusion, Larry Summers’ concerns about inflation going into the new year highlight the uncertainty surrounding the economy. While inflation has eased from its peak, there are still factors that could contribute to its persistence. As we navigate these uncertain times, monitoring inflation and its potential impact on the economy will remain crucial.
