IMF's Blanchard Says He's 'Not at All Worried' by US Inflation

Wednesday, 10 Jul 2013 02:07 PM

 

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Olivier Blanchard, the International Monetary Fund’s chief economist, said he isn’t worried about an increase in U.S. inflation and those who fear a short-term jump in prices are “plain wrong.”

Blanchard, in an interview today on the radio program “Bloomberg Surveillance” with Tom Keene, said inflation can rise because of an overheated economy or people’s expectations of cost increases.

“Neither of the two conditions is satisfied in the U.S. today,” Blanchard said. “So I’m not at all worried about inflation.”

The Federal Reserve is currently considering reducing its $85 billion in monthly bond purchases even with unemployment at 7.6 percent and the Fed’s preferred inflation index showing prices rising 1 percent from a year earlier, below the central bank’s 2 percent goal. Even so, Richmond Fed President Jeffrey Lacker has been among those raising concerns that the U.S. may face higher inflation in the future.

Lacker on May 15 cited “risks in the inflation outlook a couple of years ahead.” Harvard University economist Martin Feldstein, who chaired the White House Council of Economic Advisers in Ronald Reagan’s administration, said on Aug. 30 that more Fed monetary easing may lead to “inflationary pressures.”

Paul Volcker

Former Fed Chairman Paul Volcker, commenting on the central bank’s current policies, said May 29 that “inflation, when fairly and deliberately started, is hard to control and reverse.”

Blanchard didn’t name anyone who has expressed concerns about the possibility of a jump in prices.

“I think the people who fear inflation in the short run in the U.S. are just plain wrong,” he said.

Fed policymakers are “doing the right thing” by waiting until the economy gets better before scaling back stimulus measures, Blanchard said.

“The Fed basically has a very simple strategy, which is that as the U.S. economy is recovering, is becoming stronger, it makes sense to tighten money,” said Blanchard. “The Fed knows what it’s doing.”

Federal Reserve policymakers in June projected U.S. growth of 2.3 percent to 2.6 percent in 2013 and 3 percent to 3.5 percent next year.

Blanchard warned against reading too much into the latest changes to the IMF economic forecasts, announced yesterday. The IMF slashed its growth estimates, saying world economic growth will struggle to accelerate this year as the U.S. expansion weakens, China’s economy levels off and Europe’s recession deepens.

Global growth will be 3.1 percent this year, trimmed from a 3.3 percent forecast in April, the Washington-based fund said, trimming its prediction for this year a fifth consecutive time. The IMF reduced its 2013 prediction for the U.S. to 1.7 percent growth from 1.9 percent in April, while next year’s outlook was cut to 2.7 percent from 3 percent.

‘Emerging Markets’

“The significant part is really the decrease in the growth of emerging market countries but, no, this is not a recession,” Blanchard said. “Emerging market countries are still doing fine, the U.S. is recovering. Europe is more of an issue; recovery is really long in coming.”

Fiscal consolidation in the short run in the U.S. is “too strong,” Blanchard said.

Asked about France specifically, Blanchard said the country is slowly losing its competitiveness, and its lack of confidence in the future is worrisome.

“These things are very much self-fulfilling. When people or firms believe that the future is gloomy, they don’t spend, they don’t invest, demand is weak, output is weak and it confirms the beliefs of the people,” Blanchard said. “The prescription is, you know, indicate that there is a path out, have clear policies, decrease policy uncertainty, take a number of measures and growth will come back.”

Blanchard, 64, has served as chief economist at the IMF since 2008.

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