Don’t let the inflation genie out of the bottle: IMF economist – AFR

The global economy is facing a worrying slowdown, but the key priority for policymakers is bringing raging inflation under control, the IMF’s chief economist said on Tuesday.

With prices rising by nearly 10 percent in major economies, central banks need to stay the course and keep raising interest rates until inflation comes down, Pierre-Olivier Gourinchas said in an interview with AFP.

The International Monetary Fund’s updated World Economic Outlook painted a bleak picture of the global economy, which is slowing sharply and faces a number of risks that could push it into recession.

Soaring food and fuel prices, exacerbated by the war in Ukraine, have squeezed family budgets worldwide and even sparked civil unrest in some countries.

Aggressive moves by central bankers, including the US Federal Reserve and the European Central Bank, aim to tame these price pressures but will also slow the economy.

However, Gourinchas warned that letting inflation spiral out of control is “like letting the genie out of the bottle”.

If people assume inflation will stay high, “this is going to be a world where central banks have lost track. And it’s going to be very, very difficult to undo.”

But thankfully, “we’re not there yet,” he said.

So far, “inflation expectations have remained fairly stable.

He acknowledged that there is a risk that policymakers will overdo it and put the brakes on growth, but so far they are on the right track.

“It’s not about inflicting a recession on the global economy,” he said. “It’s about restoring price stability.”

The goal is to bring inflation back to almost 2 percent in advanced economies, maybe a little more in emerging markets, and even if rate hikes go too far and slow growth, that would mean prices falling more quickly, Gourinchas said.

Some of the key risks to the global economy are beyond the control of policymakers, including the possibility of Russia cutting off gas supplies to Europe.

But despite the very real possibility of the worst-case scenario happening, Gourinchas still sees some signs of hope.

Oil prices, which exploded to nearly $129 a barrel in March, have eased in recent weeks on expectations of a global economic slowdown, falling back below $105 for Brent, the European benchmark, on Tuesday.

There have been “synchronized” moves by central banks around the world, including emerging markets, so “we could see a much faster disinflationary path if energy prices are to continue this trend,” he said.

And policymakers in emerging markets have responded well so far, adjusting their currencies.

“Their political framework has improved over the years,” he said.