Higher inflation will force consumers to limit their spending by so much that the economy will slump into a recession by the July-September quarter, former Federal Reserve Governor Lawrence Lindsey said on Monday.
“I do think we’re going to have a recession, probably in the next quarter,” Lindsey said, in an interview on CNBC.
“Inflation is eating into consumer spending power, they’re going to have to cut back,” he said.
The former Fed governor also said the U.S. central bank was “nowhere close” on being able to control inflation.
Lindsey said he was worried that inflation was poised to move higher — and there could soon be monthly prints of the CPI above 1%. Consumer inflation hasn’t risen 1% or more for two straight months since the summer of 1980.
“That’s going to push consumer purchasing power down by about 2 points on top of the 2.5 points it has already declined since the beginning of 2021. You can’t have that much of a shock without having a recession,” he said.
Lindsey, who served as a governor from 1991 to 1997, is chief executive of The Lindsey Group, an economic advisory firm based in Washington D.C. He was famous for having been turned down for a credit card while he was on the Fed board.
Purchasing power is an estimate of wage gains adjusted for inflation. In the CNBC interview, Lindsey did not give any details on his calculations.
The Labor Department estimates that earnings adjusted for inflation fell by 2.6% over the 12 months ending in February.
But Stephen Stanley, chief economist at Amherst Pierpont, said the government’s estimate “is about as unfavorable a comparison as could be devised.” Alternate measures show that inflation is taking much less of a bite out of spending, he said.
“In sum, while inflation is likely to be a drag on the consumer, it is unlikely to prevent households from continuing to spend at a solid clip this year,” Stanley wrote in a note to clients.
Many economists think that consumers have savings stored up from the pandemic that will help them weather the bout of high inflation.
Lindsey said the Fed eventually will have to increase its benchmark interest rate higher than consumer price inflation — now running at an 8% annual rate — in order to get prices in check. At the moment, the Fed’s benchmark interest rate is in a range of 0.25% – 0.5%.
“There has never been significant disinflation since the early 1950s without the CPI being lower than the fed funds rate. We are nowhere close, nowhere close, to being able to control inflation with what we have,” he said.