Ignore ‘hysterical people’ – inflation isn’t here to stay, says economist

According to Carl Weinberg, chief economist at High Frequency Economics, a breakdown of the latest US data shows that inflation is confined to certain sectors and poses no threat to the recovery.

US CPI inflation came in at a annually 6.2% in October, the steepest climb in more than 30 years.

Energy, shelter and vehicle costs led gains, which more than offset wage increases workers received for the month.

Continued high inflation and pressures such as supply chain bottlenecks have led many economists to question the Federal Reserve’s long-held view that the peak will be “transient.”

However, stronger than expected retail sales in October and industrial production data this week has indicated that the broader economic recovery may well be on track, even as inflation pushes prices higher.

Weinberg told CNBC’s “Squawk Box Europe” on Wednesday that with industrial production and GDP back to pre-pandemic levels, the US economy has essentially recovered. He argued that the labor market lag is “typical of economic recessions”, with unemployment taking about a decade after the 2008 global financial crisis to fully recover.

That being said, The November jobs report states: that the labor market was now picking up steam, with nonfarm payrolls rising 531,000 in October and the unemployment rate falling to 4.6%.

“We have a problem with specific sectors of the economy, not with the economy in general. I was surprised to read those industrial production and production figures, but they are what they are, and we are now doing it with 5 million less people at work than before the pandemic, so this tells us that productivity should increase by maybe 3% or more compared to then,” Weinberg said.

He suggested that the market should keep productivity gains in mind when looking at wage increases, which are “tolerable with steady, steady prices as long as they are offset by productivity gains.”

Citing High Frequency Economics’ aggregation of data across the constituent sectors within the CPI measurement, Weinberg estimated that about a third is falling, while half are growing at less than 2%, which he says is “not inflation.”

“The emergence of select categories, dispersed product categories within CPIs is driving those basket price averages higher, but that doesn’t mean all prices are going up along with all wages,” Weinberg said.

“Inflation is a process of rising wages and prices. It is not a one-off event, an off-time shock to prices that comes from an understandable supply shock.”

Ignore ‘hysterical people’

Weinberg quoted Milton Friedman as saying that any intervention by the Fed based on these individual inflation flares would likely do “more harm than good.” He also highlighted comments from Fed Chair Jerome Powell and Bank of England Governor Andrew Bailey, who have both suggested that policy tightening in response to inflation due to temporary supply shocks would be counterproductive.

“Let’s not get swayed by hysterical people like Larry Summers telling us inflation is rising. Let’s listen to what the people who actually make policy tell us,” Weinberg said.

Summers was approached for comment by CNBC. The former US Treasury Secretary has in recent weeks called on the Fed and the Biden administration to deal with rising inflation, arguing that the “temporary” label had run its course.

Larry Summers at the World Economic Forum in Davos, Switzerland.

David A. Grogan | CNBC

Despite long advocating for more expansionary fiscal and monetary policies, Summers, now president emeritus of Harvard University, said in a statement. Washington Post opinion piece earlier this week that he had changed his mind in light of the evidence. He also challenged the idea that inflation was limited to just a few sectors.

“In October, prices for non-food and energy staples rose more than 12 percent year-on-year,” Summers said.

“Several indices of the Federal Reserve system that exclude sectors with extreme price movements are now at record highs.”

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