US – IMF: Cost-of-living crises could cause a long-term worsening of affordability

WASHINGTON, 6 October /ATSH-AFP/ – The International Monetary Fund (IMF) warned today that rising prices of basic products, especially food and energy, could have consequences far longer than a temporary wave of inflation.

According to the IMF, prices of essential goods continue to rise for more than a year after the start of a typical economic shock and remain high for a long period.

This means households do not face only a temporary increase in bills, but a lasting worsening of their ability to afford basic expenses.

The COVID-19 pandemic initially caused major problems in supply chains, while the war in Ukraine and the conflict in Iran have put further pressure on food, energy and fertilisers.

These shocks have kept the prices of many basic products at high levels for several years.

The IMF stresses that inflation does not disappear immediately after the initial shock passes.

Inflation expectations can remain above pre-crisis levels for years, making central banks’ work of restoring price stability more difficult.

To curb inflation, central banks have raised interest rates.

This can help reduce price pressures, but at the same time it slows the economy, investment and consumption.

The problem is particularly large for developing countries, which have less financial room to withstand an economic slowdown.

The social consequences are also significant.

Low-income households are hit hardest because a larger share of their budget goes on food, energy and other essential needs.

For this reason, the IMF warns that such shocks can increase poverty and income inequality.

The IMF recommends that governments avoid general and long-term subsidies, which are costly for budgets.

Instead, the Fund suggests temporary and targeted assistance for the households hit hardest.

However, high public debt and the repeated shocks since the pandemic have limited the ability of many poor and developing countries to intervene.