Don't rest on your laurels, warns a well-known expert. We are far from done with inflation

Inflation is easing. Investors are becoming more positive and coming up with better and better forecasts. But this leaves Larry Summers - a legend who thinks it's quite the opposite - completely cold.

Signs of weakening inflation and a few strong employment reports are not enough for Larry Summers to get positive. The economist and former Treasury Secretary worries that consumers are running out of cash, businesses are cutting costs and geopolitical uncertainty is on the rise. Combined with these risks, he warns that they could trigger a comical economic meltdown.

Inflation is falling, but Summers is not reassured. Source

"I think we may reach a point where we get caught off guard by something we hadn't counted on at all. Sometime in the middle or second half of this year, it's going to be like walking on a ledge," Summers said Wednesday on television "I'm not predicting with certainty that it will happen, but I think the risks are significantly elevated."

The U.S. economy created 517,000 jobs in January, pushing the unemployment rate to a 53-year low of 3.4 percent. And annual inflation, as measured by the consumer price index, fell to 6.5% in December from a June high of 9.1%.

Unemployment fell to an all-time low. Source

Federal Reserve Chairman Jerome Powell said last week that the latest data points to disinflation in some key segments of the economy. However, Summers, who has stood firmly against the Federal Reserve's argument over the past few years (that inflation is a temporary problem caused primarily by broken supply chains amid pandemic-related shutdowns), said getting inflation back up to the Fed's 2% target remains a challenge.

"It's going to be very difficult to balance. I think the economy will slow down and inflation will come down... but I still think the risks that either we don't get inflation down permanently or the economy tips into recession are very high."

The economist also used one of his favorite analogies to describe his fears of entrenched inflation, likening the Fed's interest rate hikes to a form of antibiotics for the economy, where the entire prescription must be taken for the effects to last. I like that a lot, by the way. I'll be using that :)

Summers admitted that the economy is stronger than he predicted, but argued that a recession is still likely to come within the next 18 months. This recession, according to the economist, could start with a complete crash. And for a reason that no one will expect. But he estimates what might help:

  • First, consumers are spending the savings they built up during the pandemic and using credit card debt to cope with the rising cost of living. This could eventually lead to many Americans' wallets being depleted and overall consumer spending falling.
  • Second, Summers worries about growing geopolitical uncertainty related to tensions between the U.S. and China. And third, he said businesses could decide to put business development or expansion plans on hold until there is more certainty about the future of the economy, which could slow gross domestic product (GDP) growth.

What do you think? What will be the "reason no one will expect" that will set off that crash?

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