Former Treasury Secretary Larry Summers Reveals Higher Inflation Than Reported
Former U.S. Treasury Secretary Lawrence Summers has co-authored a new paper that explores the impact of high interest rates on the American consumer. The paper challenges the accuracy of current inflation measurements and suggests that an old method of tracking inflation may reveal a more accurate view of the economic pain experienced by Americans.
Incorporating Pre-1983 Method of Measuring Inflation
The paper argues that the current consumer price index (CPI) used to measure inflation in the U.S. does not accurately capture the true level of inflation. It suggests incorporating economist Arthur Okun’s pre-1983 system of measuring inflation, which took into account personal interest rates and housing financing costs.
Higher Inflation Numbers
Using the pre-1983 method, the report shows that in November 2022, CPI spiked by about 18%, contrary to the official 4.1% reported by the government. This discrepancy paints a darker picture of inflation in the U.S., indicating that Americans may be facing higher inflation than officially reported.
The Impact on Consumer Well-Being
Lawrence Summers explains that when borrowing costs are not included in price indexes, as is the case with the current CPI system, the effects of interest rate increases on consumer well-being are not fully captured. By reconstructing Okun’s era CPI, which would have shown an inflation peak of 18% last year, Summers and his co-authors were able to explain 70% of the gap in consumer sentiment observed in 2022.
The Soaring Cost of Everyday Expenses
The revelation that inflation may be much higher than reported helps explain why everyday expenses like groceries and housing have become increasingly expensive. The higher inflation numbers suggest that Americans are experiencing a greater economic burden than what official reports indicate.
Personal Interest Payments and the Housing Market
The paper also highlights that personal interest payments, which are not included in the government’s CPI system, increased by over 50% in 2023. Additionally, the higher cost of borrowing has created a “deeply felt pain point” for consumers in the housing market. Homeowners are discouraged from selling due to potentially higher mortgage payments on their next home, while underwhelming price drops fail to attract new buyers.
A More Accurate Measure of Inflation
Summers and his co-authors argue that incorporating personal interest rates and housing financing costs into inflation measurements provides a more accurate representation of the cost of living for consumers. They suggest that the current CPI system may be underestimating the true level of inflation and its impact on consumer well-being.
Conclusion: Revealing Higher Inflation Levels
The paper co-authored by former Treasury Secretary Larry Summers presents a compelling argument for using an alternate method to measure inflation in the U.S. By incorporating personal interest rates and housing financing costs, the authors reveal higher inflation levels than those officially reported by the government. This discrepancy helps explain why everyday expenses have become increasingly costly for Americans. The findings highlight the need for a more accurate measure of inflation that captures the true economic pain experienced by consumers.
Hot Take: Rethinking Inflation Measurements
The revelation that inflation in the U.S. may be much higher than reported raises concerns about the accuracy of current measurement methods. Former Treasury Secretary Lawrence Summers suggests incorporating personal interest rates and housing financing costs into inflation calculations to provide a more accurate picture of the economic burden faced by consumers. By doing so, we can better understand the real impact of inflation on everyday expenses and consumer well-being.
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