On Tuesday’s “PBS NewsHour,” economist Larry Summers said that inflation is “threatening to become a spiral,” there needs to be quick action to stop the “inflationary psychology” that currently exists, and that if inflation grows, “it’s going to be very expensive and very costly to put the inflation genie back in the bottle.” Summers said, “People underestimated how much demand was going to be created by all the fiscal stimulus in the Recovery Act and all the expansionary monetary policy, and at the same time, they overestimated the economy’s supply potential. Because they didn’t recognize the damage that was going to be done over the medium term by COVID. So, when you had too much demand and not enough supply, it was predictable that that would produce a lot of upward pressure in prices, and that’s what we’re seeing.” He continued, “And now it’s threatening to become a spiral, as higher wages lead to higher prices and higher prices lead to higher wages. And so, I think we have a situation that will be challenging to manage.
The more we delay in managing it, the more challenging it will be.” He added that there’s “an inflationary psychology, and you see it in the market. You see it in the surveys. So I think we need to be moving quickly to do something about this inflationary psychology, and I’m not sure that that’s currently in trajectory without further actions, particularly by the Federal Reserve.” Summers further argued that if the Federal Reserve “allows inflation to accelerate from here, then it’s going to be very expensive and very costly to put the inflation genie back in the bottle.” Follow Ian Hanchett on Twitter @IanHanchett.
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