McConnell gives ‘kudos’ to Bill Clinton’s Treasury Secretary for warning about hyperinflation

Mitch McConnell
Senate Minority Leader Mitch McConnell of Kentucky speaks after a GOP policy luncheon on Capitol Hill.

  • McConnell gave former Treasury Sec. Larry Summers “kudos” on Monday for his comments about inflation.
  • Summers, who served in the Clinton and Obama administrations, has repeatedly slammed Biden’s spending.
  • Summers continues to forecast dangerously high inflation, but signs point to price growth cooling in June.
  • See more stories on Insider’s business page.

Senate Minority Leader Mitch McConnell is siding with an unlikely ally as he rails against President Joe Biden’s spending plans: former Treasury Secretary Larry Summers.

The senator from Kentucky gave Summers “kudos” on Monday for “predicting” the now-elevated rate of inflation. Price growth accelerated in May to its fastest one-year pace since 2008 as massive demand butts heads with supply-chain issues and widespread shortages. Republicans recently doubled down on their worries around rising inflation and blamed the Biden administration for fueling such risk.

McConnell echoed such sentiments during a Monday press conference and invoked Summers as a harbinger of the price surge.

“He predicted we would have raging inflation, and that is, in fact, what we are grappling with today,” the Minority Leader said.

Summers, who served as President Bill Clinton’s Treasury Secretary and as director of the National Economic Council for President Barack Obama, has spent much of 2021 railing against the Biden administration and the Federal Reserve for their policy stances. He criticized Democrats and Republicans in March for passing the “least responsible” fiscal policy of the last 40 years, adding both parties were creating “enormous” risks.

Just last week, the former Treasury Secretary warned the US could see inflation “pretty close” to 5% by the end of the year.

Other Republican lawmakers have seized on Summers’ words, using them as ammo with which to slam Biden’s economic agenda. Mentions of rising prices have become commonplace at GOP press conferences, and a late May memo urged party members to refer to inflation as “Democrats’ hidden tax on the Middle Class.”

Yet Republicans have frequently cited products’ year-over-year price gains as proof of overwhelming inflation, an inherently skewed comparison as it refers back to price declines seen at the start of the pandemic. The early 2020 readings now make for a lower bar to clear and boost year-over-year readings.

Summers’ remarks also directly conflict with the outlook held by the Biden administration and the Fed. The “overwhelming consensus” is that inflation will “pop up a little bit” before fading to healthy levels, Biden said Thursday. Fed Chair Jerome Powell on June 16 repeated his expectation that inflation will prove to be “transitory” as bottlenecks were addressed.

Early signs suggest Powell’s forecast is correct. Prices of used cars, industrial metals, and lumber all cooled through early June, signaling broad inflation could soon slow to less concerning rates.

The deficit-spending debate rages on

McConnell also knocked Democrats’ proposals to spend trillions of dollars more on infrastructure and family support programs. Passing a “portion” of Biden’s original infrastructure plan makes sense, but approving both of his follow-up plans would be “wildly out of proportion to what the country needs,” McConnell said.

“The pandemic is, essentially, in the rearview mirror. To continue to borrow and spend at this level is completely unacceptable for the future of this country,” he added.

The push for fiscal austerity contrasts with May comments from Treasury Secretary Janet Yellen. With the Fed set to hold rates near zero well into the future, the government should spend on support programs before debt becomes a bigger burden, she said.

“We’re in a good fiscal position. Interest rates are historically low… and it’s likely they’ll stay that way into the future,” Yellen said. “I believe that we should pay for these historic investments. There will be a big return.”

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How the American consumer may be saving the economy by spending less – and keeping inflation at bay

car shopper window sticker dealership
A car shopper looks at a window sticker in a dealership.

  • Early indicators suggest Americans are cutting spending on certain items, which is keeping inflation at bay.
  • Prices for used cars and homes skyrocketed in the spring, and consumers now seem wary.
  • Since durable goods fueled much of the recent inflation overshoot, lower spending on them could halt a spiral.
  • See more stories on Insider’s business page.

Inflation is back, maybe you heard. Or is it?

One side of the debate that has raged since the economy reopened argues Democrats’ latest stimulus is lifting inflation to dangerous levels.

The other camp, which includes the Biden administration and the Federal Reserve, attributes the recent jump in price growth to the economic reopening and views the overshoot as “transitory.” But it was quite a jump, as inflation soared to its fastest rate since 2008 in May.

For all the hemming and hawing over inflation, countering dangerous price growth is relatively simple: Consumers’ spending habits decide whether inflation spirals out of control. After governments reversed lockdown measures and vaccines reached arms, retail sales hit record highs, as reopening turned into a bona fide spending boom.

The problem with this spending boom is that supply has come up short. Bottlenecks throughout the global economy have slowed the production of goods ranging from furniture to ketchup, causing shortages almost everywhere you look and, in turn, massive price increases. And it’s spending on stuff, or durable goods – think cars and appliances rather than food and fuel – that has led broad inflation gauges higher through reopening. Prices within the category rose 3% from April to May alone after soaring 3.5% the month prior.

The American consumer is pretty intelligent, though, as early signs suggest they are shifting their spending patterns, in apparent recognition that a few key items are way out of step in terms of price increases. Instead of caving to higher prices, Americans appear to be holding off on some purchases and giving suppliers some extra time to catch up.

Used car and truck prices were the single largest contributor to the Consumer Price Index in April and May, rising 10% and 7.3%, respectively. A global shortage of semiconductors hobbled auto manufacturers through spring, leaving many to seek out previously owned vehicles.

Yet recent indicators show the price surge slowing sharply in June. The Manheim Used Vehicle Value Index rose just 0.3% in a preliminary June reading, down from the 4.8% jump in May. The meager increase signals used-car inflation could be nearing its peak before reversing course.

Separately, 24% of Americans referenced high vehicle prices when evaluating the autos market in May, according to the University of Michigan’s consumer sentiment survey. That’s the highest reading since 1997.

A similar trend is emerging in the housing market. Sales of both existing and newly built homes slid again in May as a dire housing shortage has sent prices soaring. At the same time, a record-high 48% of consumers cited high prices in their evaluations of the housing market, according to the University of Michigan survey.

The unevenness is “all common sense,” John Cochrane, a senior fellow of the Hoover Institution at Stanford University, wrote in a June 10 blog post.

“Bar and restaurant prices went down in the pandemic, less so TVs and gym equipment, and ‘stuff’ is now really getting hard to find and to produce,” he added.

There’s reason to be optimistic, according to Bank of America economists. Demand is likely to persist well after supply constraints are addressed. Americans spending today will simply pay a “temporary inflation tax” on some goods, and those deferring their demand will drive a jump in activity once price growth cools, the team led by Ethan Harris said.

“While a lot has been made of the temporary inflation pressures, there is much less discussion of the temporary constraint on real activity. However, you can’t have one without the other,” they added.

In other words, it depends on all of us, and our spending habits, to make sure inflation doesn’t spiral out of control, and we are looking pretty responsible about that in the summer of reopening.

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