By Andrea Shalal
WASHINGTON (Reuters) – International Monetary Fund chief Kristalina Georgieva said on Wednesday that central bankers should insist on fighting broad-based inflation, acknowledging that many economists were wrong when they predicted last year that inflation would decline.
“Inflation is stubborn, a broader base than we thought,” she said. “And what it means is…we need central bankers to be stubborn in their fight against inflation as it has been clear.”
If fiscal and monetary policy work well, she said at an event with Francois Villeroy de Gallo, policymaker at the European Central Bank, next year could be less painful. But if fiscal policy is not adequately targeted, it could become “the enemy of monetary policy, fueling inflation,” she said.
Georgieva’s comments came a day after the US reported an unexpected rise in consumer prices in August, with rent and food costs continuing to rise.
US Treasury Secretary Janet Yellen, in an interview with CBS News, said she believes inflation “will come down over time” due to the Fed’s actions. Yellen said the Biden administration is trying to supplement the Fed’s moves.
Georgieva said the sudden rise in inflation was just one excerpt from the uncertainty and difficulties facing the global economy. The COVID-19 pandemic and the Russian invasion of Ukraine have both contributed to price hikes and a cost-of-living crisis.
In a blog post, the International Monetary Fund warned that higher oil prices are driving up all consumer prices, which could lead to a wage-price vortex if these second-order effects persist. She said central bankers should respond “firmly”.
The International Monetary Fund, citing a study of 39 European countries, said that when overall inflation is already high, as it is now, wages tend to increase more in response to the oil price shock. She added that this showed that people were more likely to react to price increases when high inflation was clearly eroding living standards, noting that the greater the effects of the second round, the greater the risk of continuing the wage and price spiral.
The IMF said: “If the oil price shocks are large and persistent, it may lead to a persistent rise in inflation and inflation expectations, which should be met with a response from monetary policy,” noting that people tend to demand higher compensation for higher oil prices.
However, even in an environment of high inflation, wages stabilized after a year rather than continuing to rise at a steady rate, she said.
“To the extent that central banks remain sufficiently vigilant, the current high inflation may cause higher than normal cost-of-living compensation, but there is no need to switch to a sustained increase in inflation,” the IMF said.
