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Headline consumer price inflation is likely to peak around the year-end and recede to pre-pandemic levels by the middle of next year, according to the International Monetary Fund. However, it stated that there still were risks of persistent shortage-driven inflation.
The IMF has predicted that inflation may decline to around 4% by 2022, after peaking to around 6.8% this fall, in emerging markets and developing economies. The IMF report stated that in advanced and emerging economies inflation could persist for a longer duration due to a rise in housing prices, prolonged input supply shortages, continued pressure on food prices and due to currency depreciation.
Not so good news
Simulations run by the fund staff showed even higher, more persistent and volatile inflation, taking into account prolonged disruptions in supply-chains and swings in commodity prices. The report noted that low-income countries had been hit hard by a 40% increase in global food prices since the start of the pandemic.
According to the IMF’s baseline forecast for advanced countries, headline inflation should peak at 3.6% by 2021 fall and decline to around the 2% mark by the middle of 2022. It noted growth in wages that were earlier hit hard by Covid-19 – such as leisure, hospitality and retail – but added that it was accompanied by a decline in working hours with few signs of economy-wide acceleration till the middle of the next year.
Drivers of inflation
The report said that factors such as pent-up demand, accumulated savings fuelled by fiscal and monetary stimulus; rapidly rising commodity prices; and input shortages and supply chain disruptions, were driving headline inflation. The Fund stated that inflation expectations tended to be well-anchored in countries that had independent, credible, central banks with well-communicated monetary policies.