IMF had warned that inflation could prove to be persistent and central banks will have to take action

July 28, 2021: -The International Monetary Fund warned Tuesday that there’s risk inflation will prove to be over just transitory, pushing central banks to take pre-emptive action.

Currently, the issue is dividing the investment community, which has been busy contemplating if a recent increase in consumer prices is here to stay. The consumer price index of the U.S came in at 5.4% in June, the fastest pace in almost 13 years. In the U.K., the inflation rate reached 2.5% in June, the highest level since August 2018 and more than the Bank of England’s target of 2%.

For the most part, the institution based in Washington sees these price pressures as transitory. “Inflation is expected to return to its pre-pandemic ranges in most countries in 2022,” the Fund said in its latest World Economic Outlook update on Tuesday.

“There is a risk that transitory pressures could become more persistent, and central banks may need to take preemptive action,” the IMF added.

Higher prices raise the chances that central banks will start to curb their ultra-accommodative monetary policies, such as a tapering of market-friendly stimuli like asset purchases.

More persistent supply disruptions and sharply rising housing prices are some of the factors that could lead to persistently high inflation.

The U.S. Federal Reserve Chair Jerome Powell said the jobs market was “still a ways off” from where the central bank would want to see it before it reduces stimulus. He further said that inflation would “likely remain elevated in coming months before moderating.”

Earlier this month, the IMF had already pointed out that if the U.S. were to provide more fiscal support, this could increase inflationary pressures even further and lead to a hike in interest rates earlier than expected.

IMF Chief Economist Gita Gopinath said in a blog after Tuesday that “more persistent supply disruptions and sharply rising housing prices are some of the factors that could lead to persistently high inflation.”

She also warned that “inflation is expected to remain elevated into 2022 in an emerging market and developing economies, related in part to continued food price pressures and currency depreciation.”