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How Food and Energy Are Driving Soaring Global Inflation – IMF Blog

By Philip Barrett

Global inflation generally moderated at the start of the pandemic, and the downward trend continued during the first months of the crisis. But soaring prices since the end of 2020 have pushed inflation steadily higher. The average global cost of living has increased more in the 18 months since the start of 2021 than in the previous five years combined.

Food and energy are the main drivers of this inflation, because our Chart of the week shows. Indeed, since the beginning of last year, average contributions from food alone have exceeded the overall average inflation rate over the period 2016-2020. In other words, food inflation alone eroded global living standards at the same rate as overall consumer inflation in the five years immediately preceding the pandemic. A similar story applies to energy costs, which manifest themselves both directly and indirectly, in higher transportation costs. That’s not to say the prices of other items aren’t going up either. For example, services inflation has increased in the United States and the euro zone. And the relative impact of food, energy and other elements on inflation varies widely from country to country.

Inflation continued to rise until July, although somewhat more slowly. Although circumstances vary by country, the latest observations show a slight change in the composition of inflation, with the share of food increasing further while energy-related categories have moderated slightly. This is consistent with the possibility that global energy prices have been passed on to consumers faster than rising wholesale food prices.

our latest World Economic Outlook in July forecast inflation to reach 6.6% this year in advanced economies and 9.5% in emerging and developing economies, upward revisions of 0.9 and 0.8 percentage points respectively from compared to the previous three months. Next year, interest rate hikes are expected to be felt, with the global economy expanding by just 2.9% and in turn slowing price increases around the world.

As rising prices continue to weigh on living standards around the world, controlling inflation should be the priority for decision makers. Tighter monetary policy will inevitably have real economic costs, but these will only be exacerbated by delaying corrective action. As a recent Chart of the Week shows, central banks have pivoted dramatically this year towards tighter policy globally.

Targeted budget support can help cushion the impact on the most vulnerable. Policies to address specific impacts on energy and food prices should focus on those most affected without distorting prices. And with government budgets stretched by the pandemic, these policies will have to be offset by higher taxes or lower government spending.