Why IMF Wants Policymakers To Focus On Containing Inflation Despite Growing Signs Of Global Slowdown

The International Monetary Fund believes that despite growing evidence of a global slowdown, policymakers should continue to prioritize containing inflation, which is contributing to a cost-of-living crisis, hurting low-income and vulnerable groups the most.

Continued fiscal and monetary tightening is likely needed in many countries to bring down inflation and address debt vulnerabilities—and we do expect further tightening in many G20 economies in the months ahead, it said.

“Nonetheless, these actions will continue to weigh on economic activity, especially in interest-sensitive sectors such as housing,” the IMF said in its report.

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The Fund argued that where inflation remains high and labor markets tight, higher interest rates are needed. “In a few cases where inflationary pressures and signs of overheating are absent, central banks can be more cautious and allow a more expansionary stance. In all economies, careful communication is crucial, especially amid the highly uncertain outlook,” it said.

The headline CPI in the U.S. for October came in at 7.7% as against 8.2% in September. The October figure also came in lower than analyst estimates of 8%. As a result, major Wall Street indices have witnessed significant gains beginning last week. The SPDR S&P 500 ETF Trust SPY gained over 5% in the last five days while the Vanguard Total Bond Market Index Fund ETF BND gained over 2%.

Economic Outlook: IMF also pointed out that recent high-frequency indicators confirm global economic outlook is gloomier. It explained that global economic growth prospects are confronting a unique mix of headwinds, including from Russia’s invasion of Ukraine, interest rate increases to contain inflation, and lingering pandemic effects such as China’s lockdowns and disruptions in supply chains.

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