IMF has given a soft warning on the dangers of inflation

The fund expects inflation to return to pre-pandemic levels globally by mid-2022, and highlighted that central banks in countries seeing rising inflation should not shy away from tightening their policies. “Where there is a tangible risk of rising inflation expectations and more persistent price increases, early pre-action will be needed,” the IMF said in its latest World Economic Outlook report.

The fund believes that inflation expectations differ among emerging economies. Monetary policy response can be tailored to a country-specific inflation trajectory. That said, the fund cautioned against waiting too long for employment and output to bounce back at the risk of inflation expectations flare-up. “Prolonged supply disruptions, shocks in commodity and housing prices, long-term spending commitments and lowering inflation expectations could lead to significantly higher inflation at baseline,” it said. However for India, the assessment so far is that inflationary pressures are temporary and mainly due to supply-side constraints. The latest inflation print for September has reinforced this outlook.

Retail inflation has now come down to 4.5%, mainly due to the expected reduction in food prices. However, India’s inflation problem currently stems from the rise in the global oil price. Here, the IMF has said that the impact of the oil price shock on inflation expectations is small but significant. In other words, it would be foolish to ignore the current oil price jump and its impact on domestic inflation expectations.