Lawrence Summers, who passes as an elder statesman among Democratic Party economists and is relatively sane as Democrats go these days, warned in 2021 that Biden’s big spending plans would be inflationary, but no one listened to him. Now he’s back in the Washington Post warning that the recent declines in the inflation rate do not mean it is safe to sound the all-clear. He notes in the chart below that inflation in the mid-1970s seemed to be under control, until it spiked worse than ever later in the decade, and now says we might need 5 – 10 percent unemployment to cure inflation for real.

But some economists I regard highly, like Alan Reynolds, disagree. Alan thinks the Fed is being too tight, that we aren’t measuring inflation correctly, and that true inflation is falling fast. He wrote up his case for the Cato Institute a few days ago, noting that Summers overlooks the role of disruptive oil price gyrations in the 1970s, which aren’t likely to repeat unless the climatistas actually gain total power in the near future:

The mistaken lesson Fed hawks like Summers try to draw from Figure 1 is that the Fed cut rates too fast too long after the middle of the 1975 recession. But the Fed has always slashed rates in recessions ever since keeping the 5–6 percent discount rate higher‐​for‐​longer” in the deflations of 1921 and 1929. If anyone does not want the Fed to push rates too low (such as June 2008 to June 2022), then don’t let the Federal Open Market Committee (FOMC) keep launching recessions by inverting the yield curve too long. . .

The smart takeaway from Larry Summers’ misleading comparison of recent events with the oil crises of 1973–1982, and from his June 2022 cheerleading for a 5–10 percent unemployment rate, is that Fed Chairman Powell should look elsewhere for advice.

While Reynolds points to the oil shock as a missing factor in Summers’s retelling of 1970s inflation, investment manager Jared Dillian thinks there could be an opposite factor damping down inflation the next few years:

One reason inflation might not come back with a vengeance: China. China is in the midst of a great deleveraging. Prices are falling, and as the world’s second-largest economy, it will export that deflation to the rest of the world. That seems likely to happen. All its economic indicators—at least the ones it has left—are in freefall. It may even have a depression, which might have some unholy consequences. So that is one reason to believe why we won’t have Round 2 of inflation.