IMF warns elevated inflation will persist longer than expected

Elevated inflation will persist for longer than expected as supply chain disruption and high energy prices continue in 2022, the International Monetary Fund (IMF) has warned.

In its latest world economic outlook the Washington-based agency said the global economy was entering 2022 in a weaker position than previously expected as the Omicron variant spreads and countries reimpose restrictions.

Surging energy prices and supply disruptions had resulted in higher and more broad-based inflation than anticipated, notably in the United States, it said.

Inflation is expected to remain elevated in the near term, averaging 3.9 per cent in advanced economies and 5.9 per cent in emerging market and developing economies in 2022, before subsiding in 2023, it said.

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“Assuming medium-term inflation expectations remain well anchored and the pandemic eases its grip, higher inflation should fade as supply chain disruptions ease, monetary policy tightens, and demand rebalances away from goods-intensive consumption towards services,” it said.

In its report the IMF noted that fossil fuel prices have almost doubled in the past year, driving up energy costs, particularly in Europe. Meanwhile, "ongoing supply chain disruptions, clogged ports, land-side constraints, and high demand for goods have also led to broadening price pressures, especially in the United States", it said.

Rising food prices have driven inflation in sub-Saharan Africa, the IMF said.

The fund said nominal wage growth had remained contained despite employment and participation returning almost to pre-pandemic levels. But a sharp decline in unemployment in the US has been accompanied by buoyant nominal wage growth. “This suggests a degree of tightening in US labour markets not evident elsewhere,” it said.

Wage demands

Economists fear that if companies and workers try to insulate themselves against inflation by raising prices and driving up wage demands, it could trigger a wage-price spiral.

The US Federal Reserve has already signalled it will hike rates this year to combat inflation. Markets are pricing in three to four rate increases, with the first to be signalled as early as Wednesday's meeting of the Fed. The European Central Bank has so far ruled out a rate increase this year.

“Less accommodative monetary policy in the United States is expected to prompt tighter global financial conditions, putting pressure on emerging market and developing economy currencies,” it said, noting higher interest rates would make borrowing more expensive worldwide, straining public finances.

In its report the IMF cut its growth forecast for the global economy by 0.5 of a percentage point to 4.4 per cent this year, down from 5.9 per cent in 2021, largely reflecting forecast markdowns in the two largest economies, the US and China.

The “ongoing retrenchment” of China’s property sector and a slower-than-expected recovery of private consumption were also cited as limiting growth prospects.