With High Unemployment and Budget Deficits Will the IMF Call Inflation the Answer?

IMF economist Olivier Blanchard offers the idea that central banks should let inflation grow to four percent in general. He believes this can help fight crises in the future because it leaves more room for interest rate adjustments in times of need. Unfortunately, his theory could already have policy implications for today’s crisis…

According to Reuters:

“Bundesbank chief and arch inflation hawk Axel Weber led the retort in a series of newspaper articles and speeches that sharply criticized Blanchard for even raising the issue — so dangerous did he see the idea to public inflation expectations.

‘”‘The creation of policy scope to avert future crises could actually lead to asset bubbles (in real assets), which in turn would heighten the risk of future crises,’ said William de Vijlder, chief investment officer at Fortis Investments. ‘ A case of shooting ourselves in the foot if ever there was one. De Vijlder, however, said that while the idea was clearly dismissed by euro zone officials, it may gain more traction in the United States — where there is no official inflation target to begin with. Others would add Britain and Japan to that list.

“They estimate that allowing inflation to accelerate to 5 percent would cut unemployment by 1.5 percentage points more than holding inflation at 2 percent. This drop in the number of jobless would be 3 points more if higher inflation was allowed over two years. On the fiscal front, they argue, a similar higher inflation scenario would cut budget deficits by one percentage point of gross domestic product per year.”

Given persistent high unemployment and the notion that a real recovery cannot come without a recovery in the job market, it’s no surprise the IMF is considering this theory. How inflation steals from our hard-earned savings is an entirely different story.

To learn more about Blanchard’s IMF inflation theory, and how it affects the economy, you can read the Reuters article on playing house with inflation.


Rocky Vega,
The Daily Reckoning