Surging inflation, particularly in the United States, has emerged as a new threat to the global economy as it faces a "worsening two-track recovery" from the coronavirus pandemic, the International Monetary Fund warned on Wednesday.
"There is a risk of a more sustained rise in inflation or inflation expectations, which could potentially require an earlier-than-expected tightening of U.S. monetary policy," Kristalina Georgieva, the managing director of the Washington-based IMF, wrote in a blog post.
The IMF projected the U.S. economy will grow 7% this year – the highest since 1984 – boosted by a combination of an accelerated vaccine rollout and strong fiscal and monetary policy. And while the speedy rebound in the U.S. may benefit lower-income countries through increased trade, a sustained spike in inflation could pose major challenges to nations with high debt levels.
That's because, if inflation continues to rise, it may lead to a "sharp tightening" of financial conditions around the world and "significant capital outflows" from emerging and developing economies.
"It would pose major challenges especially to countries with large external financing needs or elevated debt levels," she wrote.
Federal Reserve policymakers are grappling with how to handle conflicting economic data: While inflation is on the rise – in May, the government reported that consumer prices for goods and services rose 5% in May from a year prior, the fastest year-over-year jump since 2008 – job growth remains well below the pre-pandemic level. There are still some 9.5 million Americans out of work.
During their two-day, policy-setting meeting in June, Fed officials unanimously voted to hold interest rates near zero, where they have sat since March 2020, and committed to keep purchasing $120 billion in bonds each month.
Officials gave no signs in June that it was imminently considering scaling back its aggressive bond-buying program, even though they raised headline inflation expectations to 3.4% for 2021 – a full point higher than the March forecast.
But updated economic projections released by the Fed showed that officials expect to raise rates twice, to about 0.6%, by late 2023, in part due to heightened expectations for inflation.
Longer-term projections show that Fed policymakers expect inflation to settle around 2% in the future. Although Chairman Jerome Powell has side price spikes "could turn out to be higher and more persistent than we expect," he's maintained that any inflation acceleration is temporary.
Most of the price gains have occurred in areas such as used cars, airplane tickets, and hotel rooms, Powell has said, in part because companies were thrown off by the speed of the economic recovery from the pandemic and the wave of pent-up demand among consumers who are flush with cash. Widespread bottlenecks have also severely disrupted the global supply chain.
"Those are things that we would look to, to stop going up and ultimately to start to decline as these situations resolve themselves," Powell told lawmakers in June. "They don’t speak to a broadly tight economy – the kind of thing that has led to high inflation over time."