The International Monetary Fund said on Tuesday that central banks should be prepared to act swiftly if inflation remains higher than expected.
The IMF delivered this message in its semi-annual World Economic Outlook report, which downgraded the fund’s global growth forecast for the year, and called for a more equitable distribution of COVID-19 vaccines from wealthy countries to developing and middle-income countries. Insisted. .
The IMF expects the current high inflation in advanced economies to ease over the next year. But there remains “tremendous uncertainty” around inflation forecasts due to the unusual nature of supply-side shocks, which are driving consumer prices up around the world, said IMF chief economist Gita Gopinath.
“We have never seen a recovery like this where you have a shortage in the labor market, plus you have a high level of unemployment; the fact that you have ports that are not capable of unloading container ships,” Ms. Gopinath said in a press conference on Tuesday.
“We have to be particularly vigilant to ensure that these particular supply-side shocks do not dissipate inflation expectations or create a wage-price spiral, as it will when it begins to show in more core inflation.” will do, and then require a very strong monetary policy response,” she said.
In Canada, the annual rate of inflation has moved above the central bank’s 1 percent to 3 percent target band since April, reaching an 18-year high of 4.1 percent in August. Last week Bank of Canada Governor Tiff McCalem argued that the reasons for the inflation spike would prove temporary, though he acknowledged that higher inflation could be “slightly more persistent” than the central bank.
The combination of high inflation and slow growth has led some commentators to raise the possibility that we are heading into a period of stagnation – economic stagnation and high inflation, as in the 1970s and 1980s.
Ms. Gopinath rejected the idea. Even though the IMF slightly downgraded its growth outlook, it expects the global economy to expand by 5.9 percent this year and 4.9 percent next year. “This is not something that looks remotely close to stagflation,” Ms. Gopinath said.
Also, the current situation presents a different challenge for monetary policy makers. Central bankers typically aim to control inflation by influencing economic demand through adjustments to interest rates and borrowing costs. They don’t really have the equipment to deal with supply-side constraints, such as factory closures, shipping congestion and health-related lockdowns.
Mr McCalem said last week the bank was looking at several indicators to see if a one-time price jump translates into more persistent inflation. He said short-term inflation expectations have risen, but medium- and long-term expectations remain well placed. And there is some indication that wage productivity growth is outpacing and becoming an independent driver of inflation.
Another major theme of the IMF report was the “dangerous divergence” between advanced economies and the rest of the world. The IMF expects output in advanced economies to return to pre-pandemic forecasts by next year, and exceed it by 2024. In contrast, emerging market and developing economies, excluding China, are expected to be 5.5 percent below the pre-pandemic forecast in 2024.
The biggest driver of this divergence is the “great vaccine divide”. The IMF estimates that more than 60 percent of people in high-income countries are fully vaccinated. In low-income countries, in contrast, about 96 percent of the population remains illiterate.
Ms Gopinath said high-income countries need to do more to meet existing vaccine donation promises and remove trade restrictions on the flow of vaccines and their inputs. He added that vaccine manufacturers should also expand regional production in developing countries.
“Recent developments have made it abundantly clear that we are all in this together, and the pandemic is not going to end anywhere, unless it ends everywhere. If COVID-19 has a long-term impact over the medium term, it could reduce global GDP by US$5.3 trillion over the next five years, relative to our current estimates. It doesn’t have to be this way,” she said.