Former Treasury Secretary Warns Inflation Could Resurge

Former Treasury Secretary and Harvard Professor Larry Summers makes remarks during a discussion on low-income developing countries at the annual IMF and World Bank Spring Meetings in Washington on April 13, 2016. (Mike Theiler/AFP via Getty Images)

Former Treasury Secretary Lawrence Summers warned that inflation could surge again as wages continue to rise.

While he believes that a soft landing for the American economy appears more likely than it did earlier, his latest concern is that inflation will accelerate again.

Mr. Summers spoke to Bloomberg Television’s “Wall Street Week,” right before the Labor Department’s July jobs report at the Aspen Economic Strategy Group in Colorado.

The data showed an unexpected drop in the unemployment rate and a larger-than-expected gain in average hourly earnings.

There was also a smaller increase in payrolls than predicted.

The former Clinton White House official noted that wage trends were out of sync with a 2 percent underlying inflation path.

“I don’t think we can yet be confident that we’re not going to see a real acceleration of inflation at some point down the road,” Mr. Summers told Bloomberg. “That’s the thing that I’m focused on.

“If you look at wage inflation, it was faster for the month than for the quarter, faster for the quarter than for the year.”

Although hourly earnings last month were 4.4 percent higher than the same month a year ago, after taking into account an annualized rate and comparing them with June’s figures, the figure is closer to 5 percent, he said.

After reviewing wage and productivity trends, Mr. Summers told Bloomberg that the data is “pointing to an underlying inflation rate in the 3.5 [percent] range — and it may not be decelerating.”

Inflation Almost Under Control in June

The latest monthly readings of the Consumer Price Index from June saw the slowest inflation rate since 2021.

The June data saw a 3 percent increase in inflation over the previous 12 months but jumped 4.8 percent when excluding food and energy costs.

The PCE gauge further showed 3 percent headline and 4.1 percent core rates.

“The numbers have come in a bit better over the last few months than I would have guessed,” the former Treasury Secretary observed.

He predicted that “it probably looks like there’s a better chance” that the United States may avoid a recession through an economic soft landing compared to several months ago.

However, Mr. Summers warned that “the declarations of victory by some to be substantially premature.”

He supported Federal Reserve policymakers for continuing to stay aggressive after over a year of regular interest-rate hikes.

“I’m glad that the Fed is not among those who are declaring victory,” he said.

Summers Not Worried About US Credit Downgrade

Meanwhile, Mr. Summers dismissed concerns about the downgrading of the United States’ credit rating this week but reiterated that the long-term budget-deficit trajectory needed to be addressed.

The world’s largest economy lost the top tier AAA grade at Fitch Ratings due to the exploding federal deficit.

In May, the Congressional Budget Office (CBO) predicted that the budget deficit would total $20 trillion over the coming decade.

The benchmark projections from the CBO are likely to prove optimistic, said Mr. Summers.

The CBO predicts a budget gap amounting to 6.4 percent of GPD for 2033, but the former Treasury chief, said that figure is closer to 1o percent in eight to 10 years.

Total federal debt held by the public reached 119 percent of U.S. GDP that month, the highest recorded in American history.

Former Treasury Secretaries Concerned Over Mass Budget Deficit

Mr. Summer’s two successors at Treasury urged Washington policymakers to address the country’s long-term debt challenges before the situation became insurmountable.

Former Treasury secretaries Hank Paulson and Timothy Geithner spoke with Bloomberg’s Wall Street Week earlier the week in a separate interview on August 2.

“Our fiscal trajectory is concerning,” said Mr. Paulson, who added, “We’re a rich country, and we’ve got time to deal with it. But we need to do some things in the next few years to change that trajectory.”

Mr. Geithner said, “You want to move the system to act before it’s late and hard.”

When asked whether a crisis would need to take place before Washington would act on its unsustainable borrowing needs, he answered, “I hope not.”

“The longer we wait, the more painful the solution will be,” Mr. Paulson said.

He called on Congress to drastically reduce spending and find more revenues while cutting back on entitlements.

Like his colleagues, Mr. Summers said it might take a serious crisis before Beltway policymakers finally address reining in federal borrowing and spending.

Mr. Summers did note that longer-term economic projections are usually subject to enormous uncertainty and that the previous track record for most predictions has been “terrible.”

He said that the important thing to do is to study the issues and build “intellectual capital” so that “if the scenario materializes, we’ll be able to respond more quickly.”

The former Clinton Cabinet official added that it was critical to study and address the issues in advance.

Although Mr. Summers agreed that Social Security needed reforms to avoid massive cuts when the fund runs out, he said, “I don’t think it’s critically important whether we make those adjustments in 2023 or in 2027, or in 2029.”