Targeted Support, Not Subsidies, Can Best Protect People When Inflation Surges

IMF Blog, October 6, 2026

Source details

Canonical URL: Targeted Support, Not Subsidies, Can Best Protect People When Inflation Surges

Prices of everyday essentials, including groceries, electricity, and fuel, have risen sharply over the past five years, driven largely by disruptions to global commodity markets from the start of Russia's invasion of Ukraine in 2022 through to this year’s conflict in the Middle East.
During cost-of-living crises, prices of necessities (food and energy) surge, outpacing other prices and wage growth, and are hard for households to substitute away from or reduce consumption of.

An analytical chapter of the October 2026 World Economic Outlook finds:
- Prices of necessities relative to other goods continue rising for more than a year after the start of a typical episode, and remain persistently elevated.
- Inflation remains elevated long after the initial surge in food and energy prices.
- Inflation expectations rise and stay above pre-crisis levels for years.
- Real wages fall and remain below prior levels for an extended period.
Distributional effects:
- Lower-income families face significantly higher inflation than wealthier households because food and energy account for a larger share of their spending.
- Effects on inequality and poverty are substantial, particularly in lower-income countries where basics make up an even larger share of spending by poor households.

New data from 76 countries over the past three decades show governments have relied heavily on broad-based interventions to suppress price gains during past episodes; this is particularly true in emerging market economies and low-income countries.
Typical intervention patterns:
- Advanced economies: reductions in value-added or excise taxes on food and energy products to limit consumer price increases.
- Emerging market and low-income countries: upstream measures such as producer subsidies, reductions in customs duties, or outright price controls, reflecting the prevalence of informal retail markets.
- Direct income support: advanced economies relied somewhat on targeted transfers; poorer countries more frequently introduced broad-based increases in wages and pensions.

Targeted and temporary transfers are identified as the most effective and cost-efficient way to protect poorer households when prices for basics spike; they:
- Directly support those most in need.
- Preserve scarce fiscal space.
- Allow high market prices to signal scarcity and encourage consumption reduction where possible.
Fiscal cost comparisons from a novel model framework:
- Delivering the same protection to lower-income families through consumer subsidies can require three to six times more fiscal resources than targeted transfers.
- Subsidizing producers can cost 14 to 22 times more than targeted income support.
Empirical illustration:
- During Europe’s 2022-23 energy crisis, for every euro spent suppressing electricity, natural gas, and gasoline prices, less than 20 cents reached the poorest fifth of households.
Broader inefficiencies of price-suppressing measures:
- They weaken incentives to conserve scarce resources by keeping prices artificially low.
- Simultaneous implementation by many countries can further drive up global prices, worsening policy trade-offs for lower-income countries.
- Producer subsidies lower production costs and can pass benefits to foreign consumers through lower export prices, meaning taxpayers subsidize consumers and businesses in other countries rather than vulnerable households at home.

Assistance, when warranted, should be:
- Temporary.
- Delivered through targeted income-support measures, ideally using existing social protection systems that can be scaled up quickly.
In exceptional circumstances (acute food-security concerns, heightened risks of social unrest, severe implementation constraints), broader tools may be warranted where fiscal space permits, but:
- Support should be calibrated to the temporary component of a particular price increase, with clear sunset clauses.
- When expanding beneficiaries, generosity of assistance should remain anchored to the average impact of the shock on lower-income households.
- When price measures are unavoidable, they should be narrowly focused on goods and services consumed disproportionately by vulnerable households, preferably in downstream sectors, and designed to preserve as much of the underlying price signals as possible.
Strengthening social protection before crises can improve the effectiveness of future responses and help preserve fiscal space needed for future shocks.