World Bank’s Basu Says Faster Inflation Can Ease Global Turmoil

World Bank Chief Economist Kaushik Basu recommended that developed nations let inflation accelerate for a limited period to prompt a faster exit from global economic stagnation he sees lasting two more years.

“Controlled inflation is very difficult but I think for industrialized countries, inflation is a way to balance out some of your debts without picking individuals who are winners and losers,” Basu said in Washington today. “Not a very nice thing to do but you have to do some non-nice things today given the world’s situation.”

Months of respite in the euro region’s debt crisis were brought to an end this week with a fight over a proposed tax on bank deposits in Cyprus, a condition for an international bailout to the Mediterranean island. Treasuries rallied and the euro traded at its lowest level of the year. Cyprus’s parliament rejected the levy today, dealing a blow to European plans to force savers to shoulder part of the country’s aid package.

While liquidity injections by the central banks of rich nations have bought time, they have not solved underlying problems, Basu said in his speech at the Washington-based Center for Global Development, an aid research group.

Basu’s suggestion echoed a proposal by Olivier Blanchard, his International Monetary Fund counterpart who said in 2010 higher inflation targets would give central banks more scope to react to shocks. As Blanchard did in 2010, Basu cited a 4 percent inflation figure as an example.

Blanchard’s idea was dismissed by officials from Europe to the U.S., with Jean-Claude Trichet, then the European Central Bank president, calling it “plain wrong.”

Basu said today it was probably a better moment for such an idea, while cautioning against the risks of not being able to put inflation “back into the cage.”

“This is a time when this should be considered,” he told reporters after his speech. “We’ve overborrowed, we’ve overconsumed, and this needs to be corrected, and this is probably the best way to do it now.”

Before it's here, it's on the Bloomberg Terminal.