The Economy

IMF Says Price Pressures Could Be ‘More Persistent’

"Uncertainty remains high" and "central banks may need to take preemptive action," the Fund warns in its latest World Economic Outlook.
Matthew HellerJuly 28, 2021

The International Monetary Fund has warned that the transitory inflation pressures resulting from the COVID-19 pandemic could become “more persistent,” forcing central banks to take “preemptive action.”

Echoing the U.S. Federal Reserve, the IMF said in its latest World Economic Outlook that the recent price pressures are expected to ease in 2022 once pandemic-related disturbances “work their way through prices.”

“Central banks should generally look through transitory inflation pressures and avoid tightening until there is more clarity on underlying price dynamics,” the IMF advised.

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But the Fund also said that “uncertainty remains high” and there is a risk “that transitory pressures could become more persistent and central banks may need to take preemptive action,” noting that “More persistent supply disruptions and sharply rising housing prices are some of the factors that could lead to persistently high inflation.”

As CNBC reports, the issue of how inflation is trending issue “is currently dividing the investment community, which has been busy contemplating whether a recent surge in consumer prices is here to stay.”

In the U.S., the consumer price index rose 5.4% in June — the fastest pace in almost 13 years.

Earlier this month, the Federal Reserve told Congress it wasn’t planning to change its zero-interest interest rate policy despite the recent surge in inflation but it was “prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the committee’s goals.”

In its report released Tuesday, the IMF maintained its global growth forecast at 6% for 2021, but raised its prediction for next year to 4.9% from 4.4%.

“Risks around the global baseline are to the downside,” it warned. “Slower-than-anticipated vaccine rollout would allow the virus to mutate further. Financial conditions could tighten rapidly, for instance from a reassessment of the monetary policy outlook in advanced economies if inflation expectations increase more rapidly than anticipated.”

“A double hit to emerging market and developing economies from worsening pandemic dynamics and tighter external financial conditions would severely set back their recovery and drag global growth below this outlook’s baseline,” it added.