Central bankers must be persistent in their fight against rampant inflation, International Monetary Fund chief Kristalina Georgieva said Wednesday, acknowledging that many economists were wrong to predict inflation would ease last year.

“Inflation is stubborn, it’s more widespread than we thought,” she said. “And what that means is that … we need central bankers to be as tenacious about fighting it as defiantly inflation has been.”

If fiscal and monetary policy work well, next year could be less painful, she said at an event with France’s European Central Bank chief Francois Villeroy de Gaulle. But if fiscal policy is not sufficiently targeted, it could become “the enemy of monetary policy, fueling inflation,” she said.

Georgieva’s comments came a day after the US reported an unexpected increase in consumer prices in August, with the cost of rent and food continuing to rise.

U.S. Treasury Secretary Janet Yellen told CBS News that she believes inflation will “decline over time” thanks to the Federal Reserve’s actions. Yellen said the Biden administration is trying to complement the Fed’s moves.

Georgieva said the surprising rise in inflation was “just one fragment of the uncertainty and difficulties” facing the global economy.

Both the COVID-19 pandemic and Russia’s invasion of Ukraine contributed to rising prices and a cost-of-living crisis.

In a blog post, the IMF warned that higher oil prices are pushing up all consumer prices, which could lead to a price-wage spiral if these second-order effects persist. Central bank governors should respond “firmly,” the report said.

When headline inflation is already high, as it is now, wages tend to increase even more in response to an oil price shock, the IMF said, citing a study of 39 European countries.

This showed that people were more likely to respond to price increases when high inflation clearly reduced living standards, the report said, noting that the larger the second-round effect, the greater the risk of a sustained wage-price spiral.

“If large and prolonged oil price shocks lead to sustained increases in inflation and inflationary expectations, they should be countered by monetary policy responses,” the IMF said, noting that people tend to seek higher compensation for rising oil prices.

However, even in conditions of high inflation, wages stabilized after a year, instead of continuing to grow steadily, according to the report.

“To the extent that central banks remain sufficiently vigilant, the current high inflation may still lead to higher than normal cost of living compensation, but should not translate into sustained inflation,” the IMF said.

Source by [author_name]

Previous articleEskom’s stolen power is more than shortages leading to load shedding
Next articleHeritage Month has become a historically arresting activity