Inflation 'clear and present' danger for many countries, says IMF's top economist Pierre-Olivier Gourinchas

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Inflation poses a "clear and present danger" to many countries, the International Monetary Fund's top economist Pierre-Olivier Gourinchas has warned.

This is the latest in a series of warnings on inflation. Writing for the Project Syndicate website on April 16, noted economist Eswar Prasad said policymakers had a “daunting high-stakes balancing act ahead of them” because of the resurgence of global inflation. In March, US Federal Reserve chair Jerome Powell said it was clear that inflation was “much too high”.

"Even prior to the (Russia-Ukraine) war, it surged on the back of soaring commodity prices and supply-demand imbalances. Many central banks, such as the Federal Reserve, had already moved toward tightening monetary policy. War-related disruptions amplify those pressures," Gourinchas wrote in an article accompanying the release of the IMF's World Economic Outlook report on April 19.

Gourinchas, who succeeded Gita Gopinath as the multilateral agency's chief economist on a full-time basis from April 1, added that the IMF sees inflation remaining elevated "for much longer".

Higher inflation to persist. The IMF has raised its inflation forecast (Source: World Economic Outlook report)

According to the IMF's latest forecast, consumer price inflation in advanced economies is seen at 5.7 percent in 2022, up from 3.9 percent forecast in January. In 2023, consumer prices are seen 2.5 percent higher.

For emerging market and developing economies, consumer price inflation is seen at a huge 8.7 percent in 2022 before easing to 6.5 percent in 2023.

Also read: Rise in private debt in COVID days to dent growth by 0.9-1.3% over 3 years: IMF

In comparison, the Reserve Bank of India (RBI) has forecast Consumer Price Index (CPI) inflation will average 5.7 percent in FY23. For FY24, the central bank sees CPI inflation moving in a range of 4.6-5.7 percent.

In January, the IMF saw inflation faced by households in emerging markets and developing economies at 5.9 percent in 2022 and 4.7 percent in 2023.

The IMF's forecasts assume $106.83 a barrel as the price of oil in 2022 and $92.63 in 2023. The RBI's forecasts assume the price of India's crude oil basket will average $100 a barrel in FY23.

Also read: WPI inflation rises to 14.55% in March, completes one year in double-digit territory

"The risk is rising that inflation expectations drift away from central bank inflation targets, prompting a more aggressive tightening response from policymakers. Furthermore, increases in food and fuel prices may also significantly increase the prospect of social unrest in poorer countries," Gourinchas said.

The elevated inflation levels have direct consequences for financial conditions and fiscal policy, with Gourinchas saying that the increase in global commodity prices and interest rates would reduce the fiscal space available to oil-and food-importing emerging markets and developing economies.

On monetary policy, the IMF's chief economist said central banks around the world would need to make decisive policy changes to ensure medium- and long-term inflation expectations remain anchored.

As such, "clear communication" and forward guidance on the future course of monetary policy would be key to minimising risks and disruptions, he said.

"The war also increases the risk of a more permanent fragmentation of the world economy into geopolitical blocks with distinct technology standards, cross-border payment systems, and reserve currencies,” Gourinchas warned.

Such a “tectonic shift” would cause long-run efficiency losses, increase volatility and represent a major challenge to the rules-based framework that governed international and economic relations for the last 75 years, Gourinchas said.