Responding to the Energy and Food Price Shock: Getting the Policy Details Right
IMF Blog, May 20, 2026
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- Authors: Pierre-Olivier Gourinchas, Borja Gracia, Delphine Prady, Rodrigo Valdes
- Published: May 20, 2026
Overview
- Publication: Pierre-Olivier Gourinchas, Borja Gracia, Delphine Prady, Rodrigo Valdés — May 20, 2026.
- Core dilemma: Shield households and businesses from energy and food price spikes while avoiding undue strain on already reduced fiscal space and preserving price signals.
- No one-size-fits-all: Impact differs across countries because of varied energy dependence, market structures, social protection policies, and fiscal space.
- Central principle: Fiscal measures should be temporary, targeted, timely, and tailored.
Key priorities and policy principles
- Let domestic energy prices reflect international costs.
- Shield vulnerable households with targeted, temporary support.
- Support viable small businesses with liquidity, not price controls.
- Reserve generalized subsidies and price caps for truly exceptional shocks.
- Emphasis: Preserve price signals to allocate resources efficiently and avoid shortages.
Persistence and prices
- Critical question: How long the shock lasts.
- If within historical ranges (even if large):
- Let domestic prices adjust to international market conditions.
- Fiscal policy should rely mainly on automatic stabilizers.
- Revenue will decline as activity weakens while expenditures meet increased needs via existing social assistance.
- For economies relying on imported energy:
- Higher import prices can imply a drop in real income "by as much as 2 to 3 percent of gross domestic product over a short period under the current shock."
- Adjustment should occur through lower domestic demand.
- If shock is unusually large but likely temporary and fiscal space allows:
- Governments may justify more active fiscal policy, but most price increases should be passed through upfront.
- Any intervention should smooth the adjustment rather than prevent it.
Protecting people
- Distributional impact:
- Poorer families typically spend "two or three times as much of their income on energy and food compared with wealthier households" and have less savings.
- Preferred measures:
- Targeted cash transfers delivered through existing social assistance systems to preserve price signals and limit fiscal costs.
- Temporary top-ups or widened eligibility to include lower- and middle-income households at risk of falling into poverty if coverage is insufficient.
- For very large but temporary shocks: one-time rebates or spreading price increases over time.
- As last resort, if food security is at risk and safety nets aren’t sufficient: temporary reductions in taxes or subsidies for staple foods, accompanied by a clear and credible timeline for ending them.
Supporting businesses
- Objective: Keep viable enterprises operating and avoid unnecessary bankruptcies.
- Focus: Address short-term cash-flow problems for otherwise sound or strategically important businesses, especially where higher costs quickly raise consumer prices.
- Preferred tools:
- Temporary liquidity support (government-guaranteed loans, credit lines, short-term tax and social security deferrals) — fiscally less costly and easier to undo.
- Tools to avoid or limit:
- Direct grants or equity injections — high fiscal cost and politically difficult to reverse.
Exceptional use of broad measures
- Risks of broad measures (energy-tax cuts, price caps, general subsidies):
- Mute price signals, usually benefit higher-income households more, hard to phase out, can escalate government budget costs, and raise risk of shortages if suppliers are not adequately compensated.
- Broad measures may be justified only if all specific conditions hold simultaneously:
- The price shock is clearly temporary.
- Higher energy prices are quickly feeding into broader inflation.
- Inflation expectations are at risk of becoming uncontrolled.
- Economic overheating is limited.
- Public finances have room to absorb the cost.
- Design principles if used:
- Exceptional, temporary, transparent, and tightly circumscribed.
- Governments must weigh trade-offs: price caps are easier to phase out but can drive shortages; tax cuts pose fewer supply risks but are harder to stop and may cause persistent revenue losses.
- Rule of thumb: full price freezes should be avoided.
Fiscal constraints
- Current context: Fiscal space generally tighter than in past crises because of higher debt and borrowing costs.
- Implication:
- Strengthens case for incremental and carefully calibrated responses.
- Where fiscal space exists: scope to smooth severe but temporary price increases with targeted, transparent, and temporary measures.
- Where fiscal space is limited and safety nets weak: constrained options; extreme situations may warrant rationing to manage demand, but rationing imposes very high economic costs.
- Avoid generalized subsidies that quickly exhaust scarce fiscal resources.
Sharper tradeoffs in emerging market and developing economies
- Compared with advanced economies, these economies typically face:
- Weaker social safety nets.
- Larger shares of consumer spending on food and energy.
- Tighter liquidity constraints.
- More fragile inflation expectations.
- Narrower fiscal space amid higher borrowing costs.
- Political pressure can lead to rapid government action under extraordinary shocks.
- Advanced economies: less constrained; should mainly rely on targeted transfers and automatic stabilizers, using discretionary and price-based measures only in exceptional cases.
- Global spillovers:
- When larger or richer countries suppress domestic price signals, global demand rises, international prices increase, and shortages worsen—hurting poorer importing countries the most.
Policy sequence and operational guidance
- Key question: How to act effectively — assess shock persistence, match tools to objectives, distinguish household and firm support, tailor responses to circumstances.
- Recommended sequence:
- Start with targeted, temporary measures.
- Escalate only if needed, following disciplined, well-sequenced approach.
- End goal: Help economies adjust to energy and food price shocks without costly policy mistakes, domestically and globally.
- Note: Expanded annex "Mitigating the Impact of High Energy and Food Prices" provides more details on the policy toolkit.
Source: Responding to the Energy and Food Price Shock: Getting the Policy Details Right — Pierre-Olivier Gourinchas, Borja Gracia, Delphine Prady, Rodrigo Valdés; May 20, 2026.
Content in this bundle
- Annex: Mitigating the Impact of High Energy and Food Prices