The International Monetary Fund recognizes in one of the analytical chapters of its World Growth Outlook (WEO) that the economic recovery has led to a rapid acceleration of inflation in advanced and emerging economies, driven by the firmness of demand, tight supply and rapidly rising commodity prices.
In their report, which will be published in full next week on the occasion of the annual meetings of the institution and the World Bank, the Fund’s experts predict that the increase in inflation will probably continue in the coming months before returning to pre-pandemic levels. by mid-2022, although there are still risks of acceleration.
“The good news for policy makers is that long-term inflation expectations are well anchored, but economists still disagree on the duration of the upward pressure on prices. Others estimate that the pressures will ultimately be. , transitory, as a one-off increase in spending fades, “say IMF economists Francesca Caselli and Prachi Mishra.
For the institution’s experts, it is likely that advanced economies will face moderate inflationary pressure in the short term and that its impact will moderate over time. The estimates for emerging markets seem, on the other hand, more sensitive.
The IMF forecast is that annual inflation in advanced economies will reach a maximum of 3.6% on average in the last months of this year, before returning in the first half of 2022 to 2%, in line with the objectives of central banks.
For their part, emerging markets will experience faster increases , reaching 6.8% on average and then falling to 4%. Yet again, Fund officials insist that forecasts are subject to great uncertainty and inflation could remain high for longer.
In this sense, it is important to highlight the debate that currently weighs on the upward pressure on prices. Some advocate that fiscal stimulus can make unemployment rates low enough to boost wages and overheat economies, potentially loosening expectations and leading to an inflationary spiral . Others estimate that the pressures will be temporary as a one-off increase in spending fades.
From the IMF they point out that although the pandemic represents an unprecedented disturbance, it does not seem to have substantially altered the relationship between the headline inflation of the CPI and unemployment.
The chapter recounts how inflation during the pandemic has been well anchored, referring to measures of long-term expectations drawn from sovereign bonds in 14 countries.
A key question is what combination of conditions could lead to a persistent pick-up in inflation, including the possibility that expectations could be disengaged and help trigger an upward spiral in prices.
Simulations of various extreme risk scenarios show that prices could rise much faster in the event of continued supply chain disruptions, large swings in commodity prices, and de-anchoring of expectations.
When expectations are unpinned, inflation can skyrocket quickly and be costly to curb. Ultimately, the IMF appeals to the credibility of central bank policy . That is why it recommends that they should establish sound monetary frameworks, which include the triggers for the reduction of support to the economy to curb unwanted inflation.
Policymakers need to be on the lookout for triggers for a perfect storm of price risks, which could be benign on their own, but combined can lead to rises much faster than the IMF forecasts.
A crucial feature of the outlook is that there are significant differences between different economies. Thus, for example, rising inflation in the United States is expected to help drive acceleration in advanced economies , although pressures in the euro area and Japan are expected to remain relatively weak.