Tightening actions by central banks will help to prevent high inflation from becoming entrenched: IMF

Washington: Recent tightening actions by many central banks around the world will help to prevent high inflation from becoming entrenched, the IMF said Wednesday.

In a report released ahead of the annual meeting of the International Monetary Fund (IMF) and the World Bank, the IMF said the current coincidence of rising inflation and nominal wage growth has led to concerns that a wage-price spiral—in which both wages and prices accelerate for a prolonged period—could emerge.

Many economies have seen sharp rises in price inflation since 2021 as adverse supply shocks buffet the global economy and labour markets appear tight in the wake of the acute COVID-19 shock, it said.

These inflation rises have raised concerns among some observers that prices and wages could start feeding off each other and accelerate, leading to a wage-price spiral dynamic, said the report.

In a blog post, John Bluedorn, Deputy Division Chief on the World Economic Outlook in the IMF’s Research Department, said if inflationary shocks start to come from the labour market itself— such as an unexpected, sharp uptick in wage indexation—that could moderate the effects of falling real wages, pushing up both wage growth and inflation for longer.

“For monetary policymakers, understanding the expectations process is critical. When expectations are more backward-looking, monetary policy tightening—including through clear communications by the central bank—should be stronger and more front-loaded in response to an inflation shock,” he wrote.

“In that sense, recent tightening actions by many central banks—calibrated to economy-specific circumstances—are encouraging. They will help to prevent high inflation from becoming entrenched and inflation from deviating from target for too long,” Bluedorn said.

PTI