The International Monetary Fund expects headline consumer inflation to ease by mid-2022 to pre-pandemic levels but upside risks including prolonged supply shortages could result in “significantly higher” prices.

IMF’s baseline forecast shows headline inflation for advanced economies peaking at 3.6% in the fall of 2021 and declining to about 2% by the middle of next year. Inflation in emerging market and developing economies is projected to decline to about 4% by mid-2022 after peaking at 6.8% this fall.

“Long-term inflation expectations have stayed relatively anchored so far, with little evidence that recent exceptional policy measures have de-anchored those expectations,” the IMF said in a chapter of its latest World Economic Outlook that was released on Wednesday

But the fund warned that given the “uncharted nature” of the recovery from the coronavirus pandemic, “considerable uncertainty remains.”

“Prolonged supply disruptions, commodity and housing price shocks, longer-term expenditure commitments, and a de-anchoring of inflation expectations could lead to significantly higher inflation than predicted in the baseline,” it said.

Other upside risks include food-price pressure and currency depreciations in emerging markets. Food prices around the world have jumped by about 40% during the pandemic, an especially acute challenge for low-income countries where such purchases make up a large share of consumer spending.

The IMF’s simulations of a tail risk scenario with continued sectoral disruptions and large swings in commodity prices showed significant increases in inflation above baseline while “simulations including a temporary de-anchoring of inflation expectations lead to even higher, more persistent, and volatile inflation.”

The fund said clear communication by policymakers, combined with appropriate monetary and fiscal policies tailored to country-specific contexts, “could prevent ‘inflation scares’ from unhinging inflation expectations.”

Policymakers “must walk a fine line between remaining patient in their support for the recovery and being ready to act quickly,” IMF researchers said in a blog post. “Even more importantly, they must establish sound monetary frameworks, including triggers for when they would reduce support for the economy to rein in unwelcome inflation.”

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