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IMF sees inflation subsiding in 2022, supply risks may keep it elevated By Reuters

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© Reuters. FILEPHOTO: This is the International Monetary Fund’s logo outside Washington, U.S.A. on September 4, 2018. REUTERS/Yuri Gripas

By David Lawder

WASHINGTON, (Reuters) – The International Monetary Fund stated Wednesday that consumer price inflation should reach a peak in the fall, and then recede to prepandemic levels by 2022. However, there are still risks that inflation driven by shortages may continue unanchoring.

Baseline forecasts by the IMF for advanced economies show that headline inflation will peak at 3.6% in 2021, and then decline to about 2.5% by 2022. After a peak of 6.8% in the fall, inflation will drop to about 4.4% in emerging market and developing countries next year.

As part of the World Economic Outlook, “Inflation Scares” published the staff analysis.

According to the IMF, “Sharply rising house prices combined with prolonged shortages in inputs in developed and developing countries and continuing food price pressures as well currency depreciation and currency volatility in emerging markets could lead to inflation remaining elevated longer,” said the report.

Simulators were run by staff at the fund to simulate prolonged disruptions in some sectors as well large swings on commodity prices. These could cause headline inflation to be “significantly higher” than what was expected. This simulation adds a temporary de-anchoring inflation expectations and shows an “even higher persistent, volatile, and persistent inflation.”

According to the IMF, headline inflation is a result of pent-up demand; accumulated savings; rapid rising commodity prices; supply chain disruptions and shortages; as well as pent up demand.

Low-income countries have been hard hit by a 40% rise in food prices worldwide since the outbreak of the pandemic.

In some of the most affected sectors by COVID-19, like retail, leisure and hospitality, wages have significantly risen.

The chapter also notes that the increase in wage has coincided with a decrease in work hours and that there are no signs of an economy-wide acceleration of wage growth through 2021.

The IMF stated that inflation expectations can be well-anchored when countries have central banks with credible and transparent monetary policies. Inflation accelerations can be associated with exchange rate drops, particularly in emerging markets. According to this chapter, large fiscal deficits are common in advanced economies.

The IMF chapter claims that inflation expectations have remained stable during the COVID-19 Pandemic.

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