The odds of a recession in the next year are 70% and the US has a stagflation problem brewing, former Treasury Secretary Larry Summers says

The US has a 70% chance of tipping into a recession in the next year, Larry Summers said.
The ex-Treasury Secretary pointed to rising wages, which attest to stubborn inflation in the economy.
The Fed is unlikely to get inflation back down to 2% without sparking a slowdown, he warned.

The US has a 70% risk of tipping into a recession within the next year as stagflation is beginning to take shape in the economy, according former Treasury Secretary Larry Summers.

In an interview with Bloomberg on Saturday, Summers pointed to worrisome inflation indicators, such as the Employment Cost Index, which rose 4.8% in the first quarter of 2022. Rising wages are a sign that inflation is still being felt in the economy, and could also worsen the trend and lead to a wage-price spiral, economists say.

"4% labor cost inflation just does not go with 2% underlying inflation," Summers said, adding that inflation expectations could be beginning to become entrenched in the economy. "I think we've got a bit of a stagflationary problem developing."

He added that inflation was now unlikely to get back to the Fed's 2% long-run target without a recession, pegging the odds of a "meaningful slowdown" over the next year at around 70%.

"That doesn't mean the Fed's objective should be to induce a slowdown, but if the Fed does what's necessary to contain inflation, I think a slowdown is likely to come along," Summers said.

His view echoes that of other experts, who say that the US will likely suffer from elevated inflation, or face a recession trying to get lower prices. That's because central bankers have aggressively raised interest rates to tame inflation, but high rates could easily overtighten the economy into a downturn, and rates are already at their highest level since 2007.

Inflation, meanwhile, still looms well-above the Fed's target at 5%, per the latest Consumer Price Index report.

Investors are expecting the central bank to hike rates another 25 basis-points this week, per the CME FedWatch tool, which would raise the Fed funds rate target to 5.00%-5.25%. Meanwhile, the bond market is pricing in a 58% chance of a downturn, according to the New York Fed's Recession Probabilities model.

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