Another inflation wave may be coming as big government spending and high energy costs push prices up, former White House economist says

• Inflation could rebound, thanks to high energy prices and hot economic growth.
• Inflation accelerated just 3.2% year-per-year, according to the July CPI report.
• But prices are likely hovering around the 5% range when considering those factors, one economist says.

Another wave of high prices could be coming for the US economy, thanks to factors like hefty government spending and high energy costs, according to one former White House economist.

"I think we're going to see kind of a saw-toothed inflation cycle," Kevin Hassett, the Council of Economic Advisers chairman during the Trump administration, said in an interview with CNBC on Tuesday. "We're going to see another inflation wave that's going to be stimulated by high growth and by higher energy prices."

The former White House economic expert's comments comes amid renewed optimism that disinflation is leading the US economy into a soft-landing, with prices dramatically cooler than highs recorded last summer. Inflation accelerated 3.2% in July, according to the latest Consumer Price Index report, edging closer to the Fed's 2% price target.

But there are still lingering price pressures in the economy that could bring on a resurgence of hot inflation, Hassett warned. GDP is set to grow nearly 6% over the third quarter, according to the Atlanta Fed's most recent estimate, with Hassett predicting a 30%-40% chance GDP growth will clock in higher than real interest rates in the economy.

That level of economic growth is inflationary, and prices have already gone up in key sectors. Energy prices, which alone make up around 8% of the CPI, have risen, with the average price of a gallon of gas increasing to $3.82 on Tuesday, according to AAA.

"There's just no way that inflation is going down when you get something like that, combined with deficit spending that's just absolutely insane," Hassett said of strong economic growth. When including the latest data, inflation is likely hovering around 5%, well above the 3.2% recorded in July, he added.

"I think the Fed is going to have to hike quite a bit more," Hassett said.

In Hassett's view, interest rates could "for sure" rise to 6%, a level unseen since December 2000 and something that most investors likely haven't priced into assets. As of now, investors are only pricing in a 5% chance interest rates could touch 6% by the end of 2023, according to the CME FedWatch tool. 

Higher interest rates could spell trouble for stocks and the economy as financial conditions continue to tighten. The Fed's aggressive interest rate hikes weighed stocks down heavily in 2022, with the S&P 500 sliding 20%. Meanwhile, high rates also threaten to push the economy into a recession, with the New York Fed pricing in a 66% chance the economy will enter a downturn by July 2024.