Inflation in the US reached 6.2% in October, the highest rate in the last three decades. The data has not only surprised by the amount, it has also done it by the number of elements of the basket that it has affected. Inflation is spreading across goods, services and sectors. Larry Summers, a former US Treasury Secretary and one of the country’s most respected economists, has published a column explaining the danger these changes bring and why the inflation that was temporary could end up being permanent.
Fed Chairman Jerome Powell’s Jackson Hole speech at the end of August left a clear, comprehensive and authoritative statement, based on five pillars that were then real and came to demonstrate the widespread “transitory” history of inflation that it prevailed at the time and shaped political thinking in the central bank and in the administration.
Five arguments and a caveat
However, Summers explains in his column on The Washington Post that today, “those five pillars wobble in the best of cases,” says the expert.
-Firstly, this summer Powell assured that the price increase was limited to a few sectors. No more. However, in October, commodity prices beyond food and energy increased at an annual rate of more than 12%. Several indices of the Federal Reserve system that exclude sectors with extreme price movements are now at all-time highs.
Second, Powell suggested that high inflation in key sectors, such as second-hand cars and durable goods in general, was getting under control and would start to fall again. In October, used car prices accelerated to an annual inflation rate of more than 30%, new cars rose at a rate of 17%, while home furnishings are 10% more expensive than a year ago. Inflation is spreading.
-Thirdly, Powell’s speech noted that there was little evidence of wage increases that could threaten excessive inflation. “This claim is untenable today with job vacancies and dropouts at record levels, workers changing jobs in sectors ranging from fast food to investment banking getting double-digit wage increases and ominous increases in the rate of employment. employment costs “.
-Fourth, the speech argued that inflation expectations remained anchored. When Powell spoke, market inflation expectations for the next Federal Reserve chairman were around 2.5%. Now they are around 3.1%, half a percentage point more than in the last month. And consumer confidence is at a 10-year low due to inflation fears.
– Fifth, Powell emphasized global deflationary trends. But now, in the same week, the US published the fastest annual inflation rate in 30 years, Japan, China and Germany they had their highest inflation in more than a decade. And the price of oil, the most important global determinant of inflation, is very high and forward markets do not expect it to fall quickly.
Other inflationary factors
In addition to all of the above, Summers assures that there are other signs that reveal excess liquidity and fear of higher inflation: “Meme’s shares, the purchase of retail options, the evolution of the cryptocurrency market, credit spreads and some initial valuations suggest that the markets are in a frothy (exuberant) situation. ”
Too, house prices and rents have increased by 15-20% in the last year. These movements are far from being fully reflected in the housing component of the consumer price index, which represents a third of the CPI, which implies that there are still substantial pressures for inflation that have not arrived, says this expert.
All this leaves a warning or wake-up call. Joe Biden could lose popularity if inflation stays high for too long and the authorities don’t do all they can to get it back into the fold.
“Excessive inflation and the feeling that it was not being controlled helped to elect Richard Nixon and Ronald Reagan. Now there is a risk that Donald Trump will return to power. Although an overheated economy is a relatively good problem compared to a pandemic or a financial crisis, it will metastasize and threaten the prosperity and confidence of the public unless it is clearly recognized and addressed, “says the American economist.
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