In the spring of 2021, amidst widespread celebrations of the economic rebound from the pandemic, it was Larry Summers who raised a cautionary flag to the White House and Washington, D.C., warning of the potential perils of inflation.His foresight was vindicated as price surges swept through the U.S. economy, burdening consumers and compelling the Federal Reserve to escalate interest rates to their highest levels in decades.

Inflation emerged as the paramount concern for voters, contributing to Donald Trump's return to the White House. Now, amidst the jubilation over the apparent taming of inflation, Summers is once again issuing a warning to the capital. The renowned economist and former Treasury secretary sounded the alarm on Tuesday, suggesting that the specter of inflation may not be entirely quelled. Notably, his caution does not even factor in his apprehensions regarding a potentially inflationary policy agenda from the incoming Trump administration.

"My own view is that the Federal Reserve and the markets are still underestimating the risk of overheating," Summers stated during an event organized by the New York Economic Club. "I question the rationale for prioritizing rate cuts in such a context." The ex-official from the Obama and Clinton administrations highlighted persistent core inflation above the target level—a measure that excludes the volatile prices of food and energy—a rapidly expanding economy, and a financial market that is "ablaze." The Federal Reserve reduced interest rates for the second consecutive week last week, indicating that further reductions might be forthcoming. Summers, a former president of Harvard, suggested that the Fed might be repeating the "stunning" and "enormous mistake" of 2021, when in retrospect, it was exceedingly slow to respond to surging prices by increasing rates.

"I am concerned that the Fed might be more inclined to be twice burned rather than twice shy when it comes to inflationary risks," Summers remarked. Of course, prices are no longer soaring as they did in the early months of the Biden administration, and job growth has significantly decelerated in recent months.Lower interest rate could potentially rekindle the labor market.

According to the Bureau of Labor Statistics, consumer prices rose by 2.4% in the 12 months ending in September, a sharp decline from the mid-2022 peak of 9% when gas prices soared above $5 per gallon. Analysts anticipate that Wednesday's consumer price index will reveal that the inflation rate quickened to 2.6% in October. Following another rate reduction last week, Federal Reserve Chairman Jerome Powell argued that inflation is on a "sustainable trajectory" back towards the central bank's 2% target.

However, Powell conceded during the press conference that additional efforts are necessary. "The task on inflation is not yet complete," Powell stated. Like other mainstream economists, Summers expressed concern that President-elect Donald Trump's campaign pledges could reignite inflation. "There is a significant risk that the president will attempt to implement what he has discussed. If he proceeds, the outcomes are likely to result in a higher inflation rate than what was triggered by the excessive Biden stimulus," Summers warned. In particular, Summers cautioned that if tariffs are employed aggressively, rather than merely threatened as a bargaining chip for trade negotiations, there would be a "substantial adverse supply shock from elevated prices."

Trump has also pledged to implement the most extensive deportation program in American history, deporting millions of undocumented individuals—many of whom are employed. Summers remarked that while addressing the border is imperative, deporting millions of workers poses a "substantial risk of labor shortage, which in turn acts as an inflationary force."