Inflation Is Slowing — Without the Higher Unemployment Larry Summers Said Was Necessary

Last week, former Treasury Secretary Larry Summers — speaking in front of a picturesque tropical backdrop — delivered somber news for workers: Millions of people would have to lose their jobs to hold inflation at bay. Summers has called for 5 percent unemployment for five years or 10 percent for 1 year to tame inflation. (The current unemployment rate stands at far less than that: 3.5 percent.)

Summers had been hailed as a prophet for warning back in 2020 that pandemic-driven inflation was long term rather than temporary, necessitating, in his opinion, an engineered slowdown in the economy — a tough-love approach he was credited with having the courage to voice.

But the new consumer price index released today flies in the face of Summers’s analysis, showing a decline in inflation far more rapid than the yearslong battle he has repeatedly insisted would be necessary. The CPI shows that overall prices actually declined slightly in December and that annualized inflation is the lowest it’s been in 15 months. Since the CPI report in June, which showed inflation running at 9.1 percent year over year, this is the sixth consecutive month reporting lower year-over-year inflation. The good news is raising questions from many economists and even some Federal Reserve officials about whether it is necessary for the Fed to continue its bitter war on inflation going forward, and could settle the simmering debate about whether current inflation is temporary or chronic.

Summers’s Twitter account has so far been silent on the most recent numbers. Summers did not immediately respond to a request for comment.

The CPI report follows months of the Fed’s most aggressive interest rate hikes in years in an attempt to tamp down inflation. Though at times necessary, rate hikes are a tool widely recognized as a “blunt instrument” solution to inflation and are something of a Faustian bargain: While it can decrease inflation, it also increases unemployment. And that’s exactly what’s happening, with news last week of employment growth slowing — a development met with cheers by the finance elite. The Fed’s own research has warned of the risk of a “severe recession” if the steep rate hikes persist.

Patrick Harker, the head of the Fed’s Philadelphia branch, said in a recent speech that “I expect that we will raise rates a few more times this year, though, to my mind, the days of us raising them 75 basis points at a time have surely passed. … In my view, hikes of 25 basis points will be appropriate going forward.” Harker is an alternate member of the Federal Open Market Committee, the Fed body that determines its interest rate policy, but not one of its 12 current voting members.

So good is the inflation picture painted by the new CPI that Dean Baker, an economist with the Center for Economic and Policy Research, writes that there could even be some deflation in 2023 in an area especially important to lower-income Americans: the cost of rent. “It is likely that we will see more good news on food prices going forward,” Baker writes. “Time for the Fed to declare victory and stop rate hikes!”

Despite signs that the Fed is loosening up with smaller rate hikes, it is not yet clear if its approach will continue to moderate. Fed Chair Jerome Powell recently made clear that he is aiming for a 2 percent inflation rate — still significantly less than the current 6.5 percent rate.

As the Wall Street Journal has reported, wage inequality has diminished during the three years since the 2020 start of the Covid-19 pandemic — the only time this has happened since the Reagan administration. For decades, the wages of college graduates rose more quickly than those of non-graduates. In the past few years, the wages of non-graduates are going up faster.

Meanwhile, many at the top of U.S. society are expressing anger at what they see as a lessening of ambition among American workers — many of whom, they believe, now prefer to spend time with their families than on the job, and have the leverage in the labor market to do so. Bernie Marcus, the 93-year-old billionaire co-founder of Home Depot, recently proclaimed that “nobody works, nobody gives a damn,” and that employees are taking the attitude “just give it to me. Send me money. I don’t want to work — I’m too lazy, I’m too fat, I’m too stupid.” This, said Marcus, is making him “worried about capitalism.”

As another Journal article asked, “What could prompt a widespread return of professional ambition? A severe economic downturn that sends unemployment soaring might make workers feel they need to work harder to show their value.” With inflation coming down, the question now is whether the Federal Reserve — always highly attuned to the desires of employers — will go ahead and create such an economic downturn anyway.