By Andrea Shalal
WASHINGTON, Oct 6 (Reuters) – Sharp spikes in food and energy prices will likely become more common, the International Monetary Fund said, warning such crises drive inflation expectations higher for longer, worsen poverty and threaten economic stability.
IMF research released on Tuesday examined three decades of strategies used by governments to mitigate price surges, as well as a new economic model that accounts for the higher inflation experienced by poorer households, which spend a higher share of their budgets on daily necessities.
Large surges in prices of everyday necessities have been infrequent historically, especially at the global level, but they have been a recurring source of economic and social stress over the past five years following Russia’s invasion of Ukraine in 2022 and this year’s war in the Middle East.
The new model showed a gap of 0.8 percentage point to the standard inflation measure, suggesting that 23 million more people fell below the extreme poverty line from 2021 to 2024 than previously calculated.
“In a nutshell, cost-of-living crises … impact price stability, they reduce living standards and they worsen inequality,” said Chiara Maggi, the IMF economist who co-led the research published as Chapter 2 of the forthcoming World Economic Outlook, which will be released next week.
The IMF said last month that the global economy had weathered the energy shock caused by the war in the Middle East better than feared and global economic output was still expected to expand by about 3% in 2026, but it cautioned that risks remained high.
That would match the IMF’s July forecast for 3.0% global growth, but falls short of average 3.5% growth in 2024 and 2025. The July forecast also assumed the war would wind down in mid-July, but Iran and the United States have both escalated their attacks in recent months, and the war has spilled over into neighboring countries.
INFLATION EXPECTATIONS
The IMF said its data also showed that near- and medium-term inflation expectations increased significantly during cost-of-living crises, and they remained significantly above their pre-crisis level even three years after the onset of a crisis.
Five-year-ahead inflation expectations increased modestly initially, but remained elevated even three years after a crisis, which in turn could result in interest rate increases.
Targeted transfers were the best way for countries to protect the most vulnerable while preserving price signals, the IMF said. Actions aimed at suppressing prices, including price controls and lower consumption taxes, could cost governments three to six times more money to implement, while producer subsidies could cost 22 times as much to roll out.
Broad measures could also become less effective if many countries implemented subsidies at the same time, the IMF said. Producer subsidies, often favored by developing countries, were particularly inefficient because they could lower costs for goods that were then exported, leaving domestic taxpayers to essentially subsidize consumers abroad, Maggi said.
Shantayanan Devarajan, a Georgetown University professor and former World Bank economist, said developing countries faced a serious crisis given the combined impact of higher oil prices, high debt levels, increased borrowing costs and the expected impact of this year’s super El Niño weather pattern.
“This is coming at a time when overall growth in low-income countries was at an all-time low,” he said in a videotaped discussion with Maggi that was also released on Tuesday. “Growth has slowed down tremendously.”
Some countries, including Egypt and Indonesia, had begun to shift away from broad subsidies toward targeted cash transfers, Devarajan said, urging countries to implement reforms aimed at boosting growth and limiting damage from the Middle East war.
“You know, they say, ‘Fix your roof when the sun is shining,'” he said. “When the crisis hits, it’s almost too late to introduce any of these measures, and the resistance is going to be huge.”
(Reporting by Andrea Shalal; Editing by Jamie Freed)
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