The International Monetary Fund (IMF) believes that the feared second-round effects of the current global inflation crisis are not a major concern at this time. According to a report released yesterday by the Washington-based institution, there are limited risks of entering a harmful spiral of rising prices and wages around the world.
The reason is that the aggressive tightening of central banks and the fall in real wages – due to inflation in recent times – help to anchor consumer expectations. Nobody, not even those who have achieved wage increases to compensate for their loss of purchasing power, is launching to consume. Demand is weak and, therefore, unable to add more fuel to the inflationary fire.
As the IMF, numerous organizations, central banks and the consensus of economists have repeated, this inflationary crisis is fundamentally one of supply. In its report, the Fund recalls that with the recovery that came after the pandemic, inflation soared in 2021 to levels not seen in 40 years.
The rises in prices -continues the IMF- were caused by interruptions in the supply chain, the crises in the prices of raw materials, the expansionary monetary policy and the fiscal support of the states, in addition to the explosion of consumption after the months of confinement and limitations on leisure and travel.
However, wages behaved differently. "The trajectory of real wages remained stable or fell in 2021 -adds the Fund-, and this pattern of behavior continued in the first quarter of 2022".
And what will happen now? IMF economists led by John Bluedorn looked at 22 scenarios over the past five decades where inflation and wages rose and the unemployment rate stayed low, finding that none of the cases resulted in wage and price spirals. In all cases, inflation fell and nominal wages increased.
The Fund says that inflationary pressures are currently coming from outside the labor market and that falling real wages are already helping to reduce prices. Since the beginning of this year, moreover, central banks have been aggressively raising interest rates, all of which reduces risks. “These findings provide some reassurance that sustained wage and price spirals are rare,” Bluedorn wrote in a blog post attached to the IMF website. "But that should not be a reason for complacency on the part of policymakers: there are differences between the episodes [under study and the current reality] and some show worse results."
Recent tightening moves by many central banks to rein in inflation will help prevent high prices from becoming chronic and drifting off target for too long, the fund's experts wrote. According to Bloomberg, at least 90 central banks have raised rates this year and half have done so by 75 basis points or more at one time. That is the widest adjustment in the 15 years after the 2008 crisis.
