## Addressing Inflation Pressures Amid an Enduring Pandemic _IMF Blog, December 3, 2021_ ## Source details **Canonical URL:** [Addressing Inflation Pressures Amid an Enduring Pandemic](https://www.imf.org/en/blogs/articles/2021/12/03/blog120321-addressing-inflation-pressures-amid-an-enduring-pandemic) ## Other formats - [Markdown version](/en/blogs/articles/2021/12/03/blog120321-addressing-inflation-pressures-amid-an-enduring-pandemic/index.md) - [Structured JSON version](/en/blogs/articles/2021/12/03/blog120321-addressing-inflation-pressures-amid-an-enduring-pandemic/index.json) - [Bundle manifest](/en/blogs/articles/2021/12/03/blog120321-addressing-inflation-pressures-amid-an-enduring-pandemic/bundle-manifest.json) ## Bibliographic details - Authors: Tobias Adrian, Gita Gopinath - Published: December 3, 2021 --- ### Overview - Authors: Tobias Adrian, Gita Gopinath. - Date: December 3, 2021. - Core message: Inflationary pressures are intensifying amid renewed pandemic uncertainty from Omicron, requiring monetary policy responses calibrated to country-specific circumstances. - Key judgment: Inflation is likely to be higher for longer than previously thought. ### The global inflation landscape - Global drivers: - Rising energy and food prices have fueled higher inflation in many countries. - High commodity food prices may continue to add to inflation in 2022. - About 40 percent of consumption spending in low-income countries is on food. - Core inflation patterns: - Core consumer price inflation (excluding fuel and food) has risen but with significant cross-country variation. - By annualized cumulative inflation since pre-pandemic, core inflation among advanced economies has risen most sharply in the United States, followed by the United Kingdom and Canada; the euro area increase is much less so. - Limited signs of core inflationary pressures in Asia, including in China, Japan and Indonesia. - Among emerging markets, core is dramatically elevated in Turkey. - Median inflation: - Recent rise in median inflation for the United States to around 3 percent in October is higher than for other Group of Seven countries. - Inflation expectations: - Medium- and long-term inflation expectations remain close to policy targets in most economies. - United States: long-term inflation expectations have increased but remain close to historic averages and appear well-anchored. - Euro area: expectations have increased from levels well below target to now close to it, suggesting better anchoring to the European Central Bank’s 2 percent objective. - Japan: inflation expectations remain well below the target. - Emerging markets: India, Indonesia, Russia, and South Africa show signs of anchored expectations; Turkey is an exception where the risk of expectations becoming unmoored is apparent. ### Sources of price pressures - Demand-side factors: - Strong rebound in demand supported by exceptional fiscal and monetary measures, especially in advanced economies. - Shift in spending toward goods over services. - Wage pressures in some segments of labor markets. - United States: more prolonged reduction in labor-force participation relative to other advanced economies, adding to wage and inflationary pressures. - Supply-side factors: - Supply disruptions caused by the pandemic and climate change. - Shipping delays, delivery lags, and semiconductor shortages expected to likely improve in the second half of 2022 under the baseline. - Outlook for supply-demand mismatch: - Expect attenuation over time, reducing some price pressures. - Aggregate demand should soften as fiscal measures come off in 2022. - Relationship observed: - Countries with faster recoveries to pre-pandemic trends (notably the United States) have seen sharper rises in core inflation relative to pre-crisis levels. ### Varied policy action and guidance - Historical context: - At the onset of the pandemic, global policymakers synchronized dramatic easing of monetary policy and fiscal expansion to prevent a global financial crisis. - Earlier policy stance: - Central banks initially could "look through" runups in inflation driven by a few sectors and keep interest rates low to support recovery. - Changing assessment: - Risks of further acceleration of inflation are materializing; supply disruptions and elevated demand are lasting longer than expected. - Real rates are even lower than before, implying an increasingly expansionary stance of monetary policy. - Country-specific guidance: - United States: grounds to place greater weight on inflation risks; appropriate for the Federal Reserve to accelerate the taper of asset purchases and bring forward the path for policy rate increases. - More broadly: in countries where recoveries are further along and inflationary pressures more acute, it would be appropriate to accelerate the normalization of monetary policy. - Communication and flexibility: - Major central banks must carefully communicate policy actions to avoid triggering market panic with deleterious cross-border effects. - Policymakers should remain agile, data-dependent, and ready to adjust course given extreme uncertainty, including from Omicron. ### Potentially challenging spillovers and recommendations for emerging and developing economies - Spillover risks: - Emerging market central banks face greater risk of de-anchoring of inflation expectations and thus may need to tighten earlier. - Tightening by advanced economies could cause capital outflows and exchange rate pressures for emerging markets, potentially requiring further tightening. - Observed actions: - Some emerging markets, such as Brazil and Russia, have raised policy rates sharply despite large COVID-related output shortfalls. - Policy recommendations for emerging and developing economies: - Prepare for increases in advanced economy interest rates through debt maturity extensions where feasible, thereby reducing rollover needs. - Regulators should focus on limiting the buildup of currency mismatches on balance sheets. ### Scenarios and uncertainties - Pandemic-related risks: - A variant that significantly reduces vaccine efficacy could lead to further supply chain disruptions and contractions in labor supply, pushing up inflationary pressures. - Lower demand from pandemic developments could have opposing disinflationary effects. - The sharp fall in oil prices following the discovery of Omicron and rapid imposition of travel restrictions signals volatility ahead. - Policy tradeoffs: - A more frontloaded Fed response to dampen inflation risks could result in market volatility and create difficulties elsewhere, especially in emerging and developing economies. - To mitigate such effects, policy shifts need to be telegraphed well. ### Conclusions - Policy prescription: - Responses to rising prices must be calibrated to the unique circumstances of individual economies. - Clear central bank communication is key to fostering a durable global recovery. - Where appropriate, accelerate normalization of monetary policy in economies with stronger recoveries and more acute inflationary pressures, while remaining agile and data-dependent. - Final judgment: - Varying inflation conditions and strength of recoveries across countries, together with sharply higher uncertainty associated with Omicron, necessitate tailored policy responses and careful communication. *Source: Addressing Inflation Pressures Amid an Enduring Pandemic (Tobias Adrian, Gita Gopinath), December 3, 2021.* --- ## References - [World Economic Outlook](https://www.imf.org/en/Publications/WEO/Issues/2021/10/12/world-economic-outlook-october-2021) _Source: https://www.imf.org/en/blogs/articles/2021/12/03/blog120321-addressing-inflation-pressures-amid-an-enduring-pandemic_