Larry Summers at the World Economic Forum in Davos, Switzerland.
David A Grogan | CNBC
According to former US Treasury Secretary Larry Summers, if central banks don’t finish what they started to bring inflation back to earth, it would be the “greatest tragedy” for the global economy.
Central banks around the world have aggressively tightened monetary policy over the past year to bring inflation under control, with annual consumer price increases rising to multi-decade or even record highs in most major economies.
Economists are turning cautiously optimistic as the latest data points to a slowdown in inflation, which could allow policymakers to ease and eventually halt their aggressive cycle of rate hikes.
Speaking at a CNBC-moderated panel at the conclusion of the World Economic Forum in Davos, Switzerland, on Friday, Summers said economists and business leaders experienced an “enthusiasm of relief” at the summit, but warned policymakers not to rest on their laurels .
“Hyperpopulists have lost elections and accepted their defeat, Europe has not frozen, the recession has not come, China has adjusted its policies towards the world and inflation has slowed. These are all positive things and reasons why we should be feeling better than we were a few months ago,” Summers told CNBC’s Geoff Cutmore.
“But the relief must not turn into complacency. Inflation has come down, but just as transient factors used to increase inflation, so transient factors have contributed to the declines we’ve seen in inflation, and like many trips, the last part of a trip is often the hardest.”
Although the latest data show signs that inflation is entering a sustained downward trend, it remains well above most central banks’ targets. Hence, despite the perceived economic risks of persistently high interest rates, policymakers have maintained a hawkish tone.
“The biggest tragedy right now would be if central banks prematurely shifted from a focus on maintaining price stability and we had to fight this battle twice,” Summers said.
He added that he was encouraged by recent comments from Federal Reserve Chair Jerome Powell and European Central Bank President Christine Lagarde.
“We must persevere because if inflation is allowed to rise again, it would not only threaten price stability and not only the living standards of some of the lowest-income people, but also pose very significant risks to cyclical stability,” he said.
“At the same time, both in our countries and around the world, we must remember the importance of those who have been left behind and who are bearing the greatest burden of all these necessary adjustments. That, too, will be crucial in the years ahead.”
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