IMF says price-earnings spirals rare and interest rate must contain expectations

New research by the International Monetary Fund (IMF) has shown that sustained price-wage spirals are historically rare, and recent sharp interest rate hikes by central banks should help prevent high inflation expectations from taking root.

In an analytical chapter released on Wednesday of the IMF’s upcoming World Economic Outlook report, the Fund said that rising wage and price dynamics in 2020 and 2021 were driven by “highly unusual” Covid-19 pandemic shocks. , unlike previous episodes that reacted to more conventional economic forces.

IMF researchers studied 22 episodes of high inflation and falling real wages in advanced economies over the past 50 years and found that most passed quickly.

Wage increases over the past two years have been driven by shocks to production capacity and labor supply, while prices have been driven largely by the accumulation of private savings and the release of pent-up demand as the pandemic has cooled, he said. the IMF.

Past inflationary episodes generally ended when nominal wages gradually caught up with prices over several quarters, preventing an upward spiral, the IMF said.

This usually happened when economic shocks were seen as temporary, causing wages and prices to stabilize on the basis of normal labor supply dynamics.

While this may be reassuring in the current environment, the IMF said there is a risk of prolonged price and wage inflation if inflation expectations are retroactive, anticipating that past conditions such as 2021 price dynamics will continue into the future even without further price shocks.