How Food and Energy are Driving the Global Inflation Surge

IMF Blog, September 12, 2022

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Global inflation was generally moderating when the pandemic began, and the downward trend continued into the early months of the crisis.
Surging prices since late 2020 have pushed inflation steadily higher.
The average global cost of living has risen more in the 18 months since the start of 2021 than it did during the preceding five years combined.
Inflation continued to climb through July, albeit a little more slowly.
Chart of the Week: Inflation (author: Philip Barrett; date: September 12, 2022).

Rapid increases in food prices have been one of the main drivers of quickening inflation around the world.
Since the start of last year, the average contributions just from food exceed the overall average rate of inflation during 2016-2020; food inflation alone has eroded global living standards at the same rate as inflation of all consumption did in the five years immediately before the pandemic.
Energy costs are a similar story, affecting prices both directly and indirectly through higher transportation costs.
The relative impact of food, energy, and other items in driving inflation varies considerably across countries.
Services inflation has increased in the United States and the euro area.

Latest observations show a slight change in the composition of inflation, with food’s share increasing further while energy-related categories eased slightly.
This pattern is consistent with the possibility that global energy prices have been passed on to consumers more quickly than higher wholesale food prices.

World Economic Outlook (July) projected inflation to reach 6.6 percent this year in advanced economies and 9.5 percent in emerging market and developing economies—upward revisions of 0.9 and 0.8 percentage points respectively from three months earlier.
Next year, interest-rate hikes are likely to bite, with the global economy growing by just 2.9 percent and in turn slowing price increases worldwide.

Taming inflation should be the priority for policymakers.
Tighter monetary policy will inevitably have real economic costs, but these will only be exacerbated by delaying corrective action.
Targeted fiscal support can help cushion the impact on the most vulnerable.
Policies to address specific impacts on energy and food prices should focus on those most affected without distorting prices.
Because government budgets are stretched by the pandemic, such policies will need to be offset by increased taxes or lower government spending.

Source: How Food and Energy are Driving the Global Inflation Surge (IMF blog post).