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Why America's economy may still need trillions of dollars

London (CNN Business)News that prices for American consumers are rising at the fastest rate in three decades has spooked investors and economists, piling pressure on President Joe Biden and the Federal Reserve to respond more aggressively.
What's happening: Biden and his team are now steeling themselves for high inflation to persist into 2022, a problem for Democrats ahead of next November's midterm elections. Senior Fed official Richard Clarida has indicated that if inflation stays elevated, the central bank could opt to hike interest rates next year.
Inflation is currently "much more than a moderate overshoot" of the Fed's 2% target, he said earlier this week. "I would certainly not consider a repeat performance a policy success," he continued.
Larry Summers, an economist who served in both the Obama and Clinton administrations, has been sounding the alarm on inflation for months.
"I think that the policymakers in Washington, unfortunately, have almost every month been behind the curve," Summers told CNN on Wednesday.
But not everyone thinks the Fed and the Biden administration need to change course dramatically. In fact, former Fed economist Claudia Sahm, a Summers critic, believes that America's economy still needs trillions of dollars in additional stimulus.
I asked her a few questions about this week's inflation data and the subsequent debate. Our Q&A has been condensed and lightly edited for clarity.
What's the big picture takeaway from the latest inflation data, in your view?
Big price increases in October, on top of higher-than-normal inflation since the summer, are unambiguously bad for consumers. But Covid, not inflation, is the problem. The rise and fall of cases throughout the pandemic has created immense disruptions in our economic and everyday lives.
What does a 6.2% annual increase in the Consumer Price Index say about the narrative that inflation is transitory?
The view that inflation would step back down this year was always based on the view that the pandemic would recede. Covid is still here, and as recently as a few months ago, it surged due to the Delta variant. Global supply chains are a mess, largely due to an insufficient global health response. There are no signs that the price increases due to Covid-related factors are spreading into other prices. Transitory means short-lived. As with the pandemic itself, we have been promised that it would get better soon, and it takes longer.
A number of other economists are pointing to rising rents as one example that price increases are broadening. Do you disagree with this assessment?
I disagree. House prices increased more slowly than usual during the pandemic due to eviction moratoriums, mortgage forbearance, and people waiting to move. The faster house price inflation now is basically a "getting back to normal." That normal is not good, but it is what we had before Covid.
Should the Fed stay the course? Or might it need to move faster?
The Fed decided to reduce the pace of asset purchases by $15 billion in November and December and then reevaluate at their next meeting. The world is changing quickly, and it is appropriate for them to get more data before deciding on the pace after that.
What should the response be in Congress and/or from the Biden administration? What are the implications for Biden's $1.9 trillion Build Back Better social spending package?
Congress needs to pass the Build Back Better legislation immediately. It is an investment in our children, low-wage workers, education, health care and fighting climate change. A half a year of higher-than-normal inflation is not a reason to squander this opportunity to act.

Nov 13, 2021 09:20
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