The International Monetary Fund (IMF) once again gives a wake-up call to governments after years of stimulus policies and direct aid that, although they served to appease the economic impact of the pandemic and the energy crisis, can now contribute to the rise prices by continuing to stimulate demand.
In a brief advance analysis – which will be included more extensively in its forthcoming ‘Fiscal Monitor’ report – the agency calls for “smart fiscal policies” to restore price stability and slow the rise in the cost of living that citizens face.
To prepare this document, the IMF has studied the effects of “unexpected” inflation between mid-2021 and mid-2022, “a period in which the price of food and energy grew above other items.” And it concludes that fiscal policies can help sustain the budget of the most vulnerable households if they are used appropriately.
Income impact
The agency has carried out public surveys in six representative economies (Colombia, Finland, France, Kenya, Mexico and Senegal), detecting that inflation is affecting families through three main channels: their consumption patterns, their salary income, pensions or transfers and, finally, the evolution of its assets and liabilities.
Although the impact varies between countries, there is a clear conclusion: the rapid increase in food prices has hurt the poorest families “disproportionately” in low-income countries, since food “represents a greater part of its total consumption.
In the same way, they certify that the rise in prices also eroded more seriously the income of those economies that import raw materials, where wages “could not keep up” with the rise in prices.
Faced with this situation, the IMF appeals to this old economic recipe of supporting the actions of central banks with fiscal policies, making it clear that when monetary organizations act alone, without the support of governments, they need to “substantially” increase interest rates. of interest so that its fight against inflation is effective. “Fiscal tightening allows rates to rise less,” they insist. According to his calculations, reducing public spending by one percentage point of GDP can limit inflation by half a percentage point.
The IMF stresses, however, that this cost containment must find a balance with greater transfers to the most vulnerable families, as they are groups that benefit more from factors such as public services or who may be affected to a greater extent by adjustment policies such as a tax increase or spending cuts.