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Inflation panic in unknown recovery From IMF economist

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A key question is what combination of events will lead to a sustained and rapid rise in prices

This year, the economic recovery of developed economies and emerging market economies has led to a rapid rise in inflation. The driving factors include the stabilization of demand, the shortage of supply and the rapid rise of commodity prices.

In the latest issue of world economic outlook, we predicted that inflation may continue to maintain a high level in the coming months and fall back to the pre epidemic level by 2022, but the risk of accelerating inflation still exists.

The good news for policymakers is that long-term inflation expectations remain very stable. But economists are still divided over how long the upward pressure on prices will last.

Some economists said that the government’s stimulus measures may push the unemployment rate down, and even trigger wage increases and economic overheating, which may change inflation expectations and trigger a self fulfilling inflation spiral. Other economists estimate that the one-time surge in spending will pass and that inflationary pressures will eventually be only temporary.

Inflation dynamics and demand recovery

We studied whether the overall CPI inflation is consistent with the trend of unemployment. Although it is difficult to estimate the relationship between the two in the epidemic period, this unprecedented disturbance does not seem to change the relationship between the two in essence.

The recent inflationary pressure in developed economies may be mild, and its impact will gradually weaken over time. On the contrary, for the relationship between idle resources in emerging markets (unused resources in economies) and inflation, their estimates seem to be more sensitive to the inclusion of epidemic periods in the estimated sample.

Stabilizing inflation expectations

According to the indicator of long-term inflation expectation (i.e. breakeven inflation rate derived from 14 national bonds), inflation has been very stable during the epidemic. During the crisis and recovery, these indicators of concern have remained stable so far, but there is still uncertainty about their future trend.

A key question is, what combination of conditions may lead to a sustained sharp rise in inflation? Among them, what factors will lead to changes in inflation expectations, resulting in self fulfilling spiral price increases?

In the past, such events were often related to the sharp depreciation of exchange rates in emerging markets, which often occurred after the sharp expansion of fiscal deficits and current account deficits. The government’s long-term spending commitments and external shocks may also lead to changes in inflation expectations. This is especially true in economies where central banks are considered unable or unwilling to curb inflation.

In addition, even if inflation expectations are very stable, if inflation is higher than the target set by policymakers for a long time, it may also lead to changes in inflation expectations.

Sector shock

The epidemic has led to significant price changes in some sectors, especially the food, transportation, clothing and communication sectors. It is worth noting that, by the standards of recent history, the dispersion / change range of prices in various sectors is still relatively small, especially when compared with the global financial crisis. This is because the average price change of the three components of the Consumer basket (fuel, food and housing) in the post epidemic era is relatively small and the change lasts for a short time.

We predict that the annual inflation rate of developed economies will reach an average peak of 3.6% in the last few months of this year, and then fall back to 2% in the first half of 2022, which is in line with the goal of the central bank. Inflation in emerging markets is expected to rise faster, averaging 6.8%, and then fall back to 4%.

However, there is great uncertainty in the above forecast, and inflation may remain high for a longer time. Possible factors leading to this result include soaring housing costs in developed and developing economies, continued supply shortages, or food price pressures and currency devaluation in emerging markets.

During the epidemic, global food prices rose by about   40%

, this poses a particularly serious challenge for low-income countries, where a large part of consumer spending is spent on food procurement.

We have simulated several extreme risk scenarios, and the results show that if the supply chain disturbance continues, the commodity price changes sharply or the inflation expectation changes, the price rise may accelerate significantly.

Policy Significance

When inflation expectations change, inflation may rise rapidly, and the cost of controlling inflation will become very high. After all, the policy credibility and price expectation of the central bank are difficult to accurately define; To evaluate the anchoring degree of inflation expectation, we can not completely rely on the relationship obtained from historical data.

Therefore, policymakers must weigh carefully, be patient to promote economic recovery, and be prepared to act quickly. More importantly, they must establish a sound monetary policy framework, including a trigger mechanism, so as to decide when to reduce support for the economy, so as to curb unpopular inflation.

These trigger mechanisms may include various early signs indicating changes in inflation expectations, such as forward-looking investigations, unsustainable fiscal deficits and current account deficits, sharp fluctuations in exchange rates, etc.

Case analysis shows that strong policy actions can often curb inflation and inflation expectations, and stable and credible central bank communication also plays a very important role in anchoring inflation expectations. National authorities must be alert to the trigger factors that may trigger the “perfect storm” of price risk. These factors may seem benign alone, but if combined, they may cause prices to rise much faster than the IMF forecasts.

Finally, there are huge differences in inflation prospects in different economies, which is an important feature. For example, if US inflation accelerates, it is expected to accelerate inflation in developed economies, but inflation pressure in the eurozone and Japan is expected to remain at a relatively low level. Read more: IMF economist: the economic recovery is not synchronized and differentiated, which may put financial stability at risk, Forbes : Musk’s salary will be 71 billion yuan in 2020, becoming the highest in the world ceoimf: high global house prices endanger economic stability IMF: it is expected that the ratio of U.S. debt to GDP will expand to 116.9% in 2023 ft Chinese chart IMF in 2013: emerging markets or current crisis due to capital outflow IMF: corporate bonds in emerging markets quadruple in ten years, and the foreign debt of China’s real estate enterprises soars IMF: it is expected that the global economy may recover in the next two years UNCTAD: digital economy report 2021 (238 Pages) UNCTAD: Trade and development report 2021 United Nations Trade and Development Organization: Commodity dependence report 2021 (248 pages) BCG: Global Wealth Report 2021 – customer first, Nuggets three wealth management customer groups united nations trade report: least developed countries achieve sustainable development through the development of productive capacity “Graduation” Hurun: Apple ranked first in the world’s top 500 in 2021 escap: United Nations Global Survey on digital and sustainable trade facilitation in 2021

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