A well-communicated plan is needed for a possible gradual exit from expansionary monetary policy.
(Photo: Reuters)
Berlin The International Monetary Fund (IMF) believes it is unlikely that the current rising prices pose a direct threat to prolonged inflation. However, the organization warns of various uncertainties. In an excerpt from its “World Economic Outlook” (WEO) published on Wednesday, the IMF outlined the danger of “significantly higher inflation”.
Prices have been rising in most industrialized nations for several months. In Germany, the inflation rate last increased in September to 4.1 percent compared to the same month last year. The price level stagnated compared to August. In the USA, the rate of increase was 5.3 percent compared to the same month last year and 0.3 percent compared to July.
The rising prices are mainly driven by temporary effects on the supply side. The aftermath of the corona pandemic is causing problems in international supply chains. Energy prices are at record highs. The oil price for the North Sea variety Brent is at a three-year high.
At the same time, consumers are partially reducing their accumulated savings during the pandemic and consuming more. In Germany, there is a base effect from the normalization of VAT rates at the beginning of the year.
Top jobs of the day
Find the best jobs now and
be notified by email.
According to the IMF forecast, inflation rates will peak at the end of the year, and rates will return to those before the crisis by mid-2022. In the base scenario, the IMF expects an inflation rate of 3.6 percent in the developed economies in the last few months of this year. For mid-2022, the estimate is only two percent. In an extreme scenario, around three percent would be conceivable.
Inflation expectations as a self-fulfilling prophecy
The prospects for emerging and developing countries point to a return to trend inflation of around four percent by mid-2022. However, there are “upward trends” for both groups of countries.
“Persistent supply disruptions, raw material and property price shocks, longer-term spending commitments and the unanchoring of inflation expectations could lead to significantly higher inflation than predicted in the base scenario,” it says.
While the supply-side problems and price shock are likely to be largely temporary, inflation expectations are a particular concern. According to the WEO forecast, this trend for the development of the price level in the developed economies is also tending towards two percent.
But the general uncertainty about the further course of the price level is pronounced because it is not clear when the temporary effects will actually disappear and at the same time the increased consumer mood will persist: “These uncertainties stir up concerns that inflation will permanently overshoot the central bank’s targets , Defused expectations and thus lead to a self-fulfilling inflation spiral. “
The reason: higher inflation expectations generally make saving less attractive; instead, more is consumed, which is reflected in higher inflation. The IMF therefore describes its own forecast as “associated with considerable uncertainties”.
The IMF therefore calls for “clear communication” to prevent fears of inflation. A well-communicated plan is needed for a possible gradual exit from expansionary monetary policy. The US Federal Reserve (FED) and the Bank of England have already communicated in this way. The European Central Bank (ECB) has so far hardly deviated from its course in this regard. Only ECB board member Isabel Schnabel indicated in her much-noticed speech in Baden-Baden a few weeks ago, “to finally pave the way out of the low interest rate environment”.
The IMF writes that political decision-makers have to walk a tightrope. You would have to be patient to continue supporting the economic recovery. At the same time, they would need to prepare to act quickly if inflation expectations pick up.
More: Four global trends suggest that currency depreciation will continue