New York CNN Business  — 

It’s time to sound the inflation alarm inside the White House.

From used cars and gasoline to lumber and food, prices are surging. The return of inflation, after a decades-long absence, is squeezing families and businesses recovering from the pandemic.

In many ways, higher prices can be seen as evidence that President Joe Biden’s economic and health policies are working. The successful rollout of vaccines is allowing companies to reopen and Americans to resume traveling, spending and working. Growth is being turbo-charged by rock-bottom interest rates and unprecedented fiscal stimulus.

For many years, the nightmare for the US economy was a Japanese-style spiral of falling prices. Now, the risk for the White House is an economy that overheats, forcing the Federal Reserve to cool it down by raising interest rates so aggressively that it short-circuits the Biden boom, both on Main Street and Wall Street.

The return of inflation also undermines Biden’s efforts to ease inequality. That’s because higher prices on essentials are most painful for low-income families — the same ones hit hardest by the pandemic.

“The cruel thing about this is, once again, the little guy is being hurt,” Richard Fisher, former president of the Dallas Federal Reserve, told CNN Business.

Summers: ‘The inflation risk is real’

Larry Summers, the Clinton-era Treasury secretary, is sounding the alarm on inflation via a series of increasingly urgent warnings.

In an op-ed titled “The inflation risk is real,” Summers wrote in the Washington Post Monday that overheating is now the “primary risk” facing the US economy. The former Obama official said the Fed may need to begin to tighten policy and urged the Biden administration to “move past emergency policies,” including addressing a growing shortage of workers.

Noting that inflation spikes “disproportionately hurt the poor” and are linked to diminished trust in government, Summers reminded progressives that inflation played a big role in electing Republican presidents in 1968 and 1980.

The good news is that the Fed, and many economists, expect prices to cool off after the initial shock of the reopening passes.

The bad news? There is no inflation playbook following a once-in-a-century pandemic. No one truly knows how “transitory” inflation will be.

“We were never good at forecasting. Nobody is, not even the brilliant minds at the Fed,” Fisher said. “I pray the Fed will be right. I hope it’s transitory. It’s not clear it will be.”

Biden official: No sign of long-term inflation

The White House is pushing back on these inflation jitters.

“We expect temporary imbalances between supply and demand, whether it is fewer rental cars available at first or fewer airline flights as airlines move back to their regular schedules,” a White House official told CNN Business on Tuesday. “These are signs of recovery.”

Although the Biden official acknowledged specific supply chain bottlenecks will take time to sort out, the official added: “We do not see signs of persistent dislocation or long-term inflation.”

“Our team closely monitors inflationary pressures but inflation is first and foremost under the purview of the Federal Reserve,” the White House official told CNN Business.

However, inflation is not just a problem for the US central bank.

“The Fed is not the only player. Fiscal authorities in the US are going big,” said Randall Kroszner, a former Fed governor who is now deputy dean at the University of Chicago Booth School of Business.

Honeywell (HON) CEO Darius Adamczyk urged Washington to “be careful” about doing more to boost the red-hot economy. “We are seeing very substantial inflation,” Adamczyk told CNN Business last week. “It’s definitely here and it’s probably a bit more pronounced than most people think.”

Inflation psychology is changing.

That’s not to mention the political headaches that inflation could bring for Biden.

“If we see gasoline and food prices move sharply higher, that could become a problem for the Democrats in 2022,” said Greg Valliere, chief US policy strategist at AGF Investments. “The risk is that both monetary and fiscal medicine could be too strong. It could be an overdose.”

One concern is that inflation expectations, by businesses and consumers alike, are rising sharply. People no longer expect prices to remain in check. That’s a big deal.

“You’re starting to see a shift in psychology around inflation,” said Aneta Markowska, chief economist at Jefferies. “That can become self-fulfilling. If everyone believes transitory price pressures will persist, that alters behavior.”

Such behavioral changes can morph into a vicious cycle, with businesses stockpiling more goods and consumers buying products ahead of schedule. That would only reinforce inflationary pressures.

“This is a never-seen-before environment,” said Geoff Freeman, CEO of the Consumer Brands Association, the trade group that represents the $2.1 trillion food, beverage and consumer products industry. “The cost of every ingredient you could possibly imagine is going up. The cost of transportation, from truck to rail and ocean, is going up. Labor is going up.”

Freeman, who wrote a letter to the White House warning of a “perfect storm” of surging demand and rising costs, said he’s been having discussions with the administration. He urged Biden to reevaluate regulatory and tax proposals and take steps to ease the shortage of truckers hitting the US economy.

“Let’s let a little steam out of the system before it overheats,” Freeman told CNN Business.

The fate of infrastructure

Summers similarly urged Biden to recalibrate his policies.

“Higher minimum wages, strengthened unions, increased employee benefits and strengthened regulation are all desirable, but they, too, all push up business costs and prices,” the former Treasury secretary wrote in Monday’s op-ed.

The booming economy, and the resurgence of inflation, also complicate the case for Biden’s proposals to spend more than $4 trillion on the American Jobs Plan and American Families Plan.

However, it’s important to remember that unlike the $1.9 trillion package signed into law in March, these are not rescue packages designed to give the US economy a short-term sugar high. Biden’s proposals are long-term investments aimed at boosting long-term growth and easing inequality. And they include elements that economists expect will boost productivity and ease the shortage of workers.

“The net stimulative effect for the overall economy is pretty neutral,” said Markowska, the Jefferies economist.

Time to talk tapering?

Meanwhile, the Fed still has its foot on the gas. Interest rates remain near zero and the central bank is still buying a staggering $120 billion in bonds each month.

Fisher urged the Fed to immediately begin tapering its bond purchases because waiting too long risks higher inflation down the road.

“You don’t have to slam the brakes. You can tap on them,” the former Dallas Fed president said.

The challenge for the Fed is unwinding its emergency policies — without setting off a 2013-style taper tantrum that roils markets and undermines confidence in the economy.

“Once you get in,” said Kroszner, the University of Chicago dean. “it’s very difficult to get out.”