Credit: (Image: IMF)

Chart Of The Week

Inflation to be Elevated for Longer on War, Demand, Job Markets

The war in Ukraine will quicken inflation, which we now expect to remain elevated for longer than previously forecast on higher commodity costs and broader price pressures.

Jorge Alvarez, Philip Barrett

April 27, 2022

As the Chart of the Week shows, our latest World Economic Outlook now projects faster consumer-price increases this year for advanced economies as well as in emerging market and developing economies. These forecasts also have a high degree of uncertainty.

Russia’s invasion of its neighbor will likely have a protracted impact on commodities, affecting oil and gas prices more severely this year and food prices well into next year.

Four main factors shape our outlook:

Under these conditions, we expect already-elevated inflation to persist for longer. Our projections call for the pace in advanced economies to reach a 38-year high of 5.7 percent, while price increases in emerging market and developing economies will accelerate to 8.7 percent, the fastest clip since the global financial crisis in 2008. Those rates would then cool next year to 2.5 percent and 6.5 percent, respectively.

Importantly, surging prices will have the greatest effects on vulnerable populations, particularly in low-income countries. High overall inflation will also complicate the trade-offs for central banks between containing price pressures and safeguarding growth.

While our baseline expectation is that inflation will eventually ease, inflation could turn out higher for several reasons. Worsening supply-demand imbalances, including from the war, and further commodity-price gains could keep the pace of inflation persistently high. Moreover, both the war and renewed pandemic flare-ups could prolong supply disruptions, further increasing costs of intermediate inputs. In a context of tight labor markets, nominal wage growth could also accelerate to catch up with consumer-price inflation as workers seek higher wages to preserve their purchasing power. This would further intensify and broaden inflation pressures, with the risk of de-anchoring inflation expectations.

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