The International Monetary Fund warned Tuesday that inflation will prove to be more than temporary, pushing central banks to take preventive action.
The issue is currently dividing the investor community, who are busy pondering whether the recent surge in consumer prices will continue. In the US, the consumer price index was 5.4% in June – the fastest increase in nearly 13 years. In the UK, inflation reached 2.5% in June – its highest level since August 2018 and above the Bank of England’s target of 2%.
The Washington-based institution views this price pressure as largely temporary. “Inflation is expected to return to its pre-pandemic range in most countries in 2022,” the fund said in its latest update to the World Economic Outlook, released Tuesday.
However, she warned that “uncertainty remains high”.
“However, there is a risk that temporary pressures will persist and central banks may need to take preventive action,” the IMF said.
Higher prices increase the chances that central banks will begin to tighten their ultra-accommodative monetary policies, such as reducing market-friendly incentives such as bond purchases.
Persistent supply disruptions and soaring house prices are some of the factors that could lead to persistently high inflation.
IMF chief economist
Federal Reserve chairman Jerome Powell said earlier this month that the labor market was “still a long way off” from what the central bank would like to see before reducing incentives. He added that inflation “is likely to stay high for the months ahead before it slows down”.
The IMF had already indicated earlier this month that stronger fiscal support from the US could further increase inflationary pressures and lead to an earlier than expected rate hike.
IMF chief economist Gita Gopinath said in a blog post Tuesday that “persistent supply disruptions and soaring house prices are some of the factors that could lead to persistently high inflation.”
She also warned that “inflation in some emerging and developing countries is expected to remain high through 2022, partly related to continued food price pressures and currency devaluations”.
Global recovery is “not assured”
The IMF left its global growth forecast for 2021 at 6% on Tuesday, but revised its expectations for 2022.
Instead of a gross domestic product rate of 4.4%, as forecast in April; the fund now sees a growth rate of 4.9% over the next year.
“The 0.5 percentage point increase for 2022 is largely derived from the projected increase for advanced economies, particularly the United States, which reflects expected legislation on additional fiscal support in the second half of 2021 and improved health metrics across the group” said the IMF said.
However, the outlook depends on the coronavirus vaccination campaigns.
According to Our World in Data, 13.81% of the world’s population are fully vaccinated against Covid-19 and 13.46% are partially vaccinated. This shows the stark difference between advanced and developing economies.
In the UK and Canada, more than 54% of all citizens are fully vaccinated. In South Africa this number drops to 3.9% and in Egypt to 1.57%.
“Access to vaccines has emerged as the main fault line along which the global recovery is splitting into two blocks: those who can look forward to further normalization of activity later this year (almost all advanced economies) and those who still with infections resurrecting and the rise in COVID. faced are fatalities, “said the fund.
“However, even in countries where infections are currently very low, recovery is not guaranteed as long as the virus is circulating elsewhere,” warned the IMF.