Larry Summers Says Consensus View That Inflation Will Come Way Down Is 'Outside Range Of Normal Historical Experience'

Former Treasury Secretary Lawrence H. Summers believes if one looks at the history of developed nations in the 1970s, it is clear that prospects of bringing down inflation are not very encouraging.

What Happened: “The history of developed countries since 1970 is very discouraging about the prospects of bringing down 8 percent inflation,” Summers tweeted.

Historical Experience: The former Treasury Secretary also explained how historical experience may be too optimistic a guide to current times, especially when labor markets are very tight. 

"Populism has never been stronger. Labor markets are super tight. Government debt ratios are at peak levels. Globalization is certainly no longer spreading and may be receding,” Summers said in his tweet.

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The U.S. Federal Reserve was set to announce its monetary policy in early November, and market participants had already started factoring in a relatively less aggressive central bank. 

The SPDR S&P 500 ETF Trust SPY had gained 2.55% in October over the preceding month, while the Vanguard Total Bond Market Index Fund ETF BND had shed over 1.61%.

On Consensus: Summers also cited a chart to explain how consensus about inflation coming down at the time was outside the range of normal historical experience.

Almost never does high inflation come down fast. Today's consensus view that inflation will come way down is, as this figure from Jim Reid at Deutsche illustrates, outside the range of normal historical experience. pic.twitter.com/Mbnb4yg3UV

— Lawrence H. Summers (@LHSummers) October 27, 2022

The former Treasury Secretary believes inflation will persist for some time. “We don’t have any experience with soft landings from high inflation without recessions,” Summers said.

This story was originally published on Oct. 27, 2022.

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Photo: International Monetary Fund on Flickr