The IMF recommends fiscal tightening to lower inflation

The IMF  assured that “central banks will probably still have to continue raising interest rates a bit, but not as much as in the absence of fiscal restrictions”

The International Monetary Fund (IMF) on Monday recommended fiscal tightening policies to help lower inflation, which are offset by incentives for the most vulnerable groups, to prevent the full weight of the measures to contain prices from falling on increases in prices. interest rates.

“Fiscal tightening is appropriate in many countries because public debts are high and because with high inflation it will be possible to reduce demand in the economy and, therefore, inflationary pressures will be reduced,” Paolo Mauro pointed out in a talk with the media. , deputy director of the fund’s tax affairs department.

With this, he added, “the need for central banks to raise interest rates so much is reduced.”

“Of course, central banks will probably still have to keep raising interest rates a bit, but not as much as in the absence of fiscal restraint,” he added.

The IMF advanced this Monday a chapter of its Fiscal Monitor, which it will publish in its entirety next week, within the framework of the spring meetings held in Washington by the IMF and the World Bank.

With the title “Inflation and disinflation: What role does fiscal policy have?”, a team of IMF analysts, led by Marcos Poplawski and Carlos Gonçalves, analyze the impact of inflation on public finances and offer a series of recommendations for cut prices.

The main advice, the aforementioned fiscal tightening, although accompanied by “specific cash transfers to the most vulnerable groups of the population,” Mauro specified.

“If you provide that specific support, you not only dampen the consumption effects of the poor, but you also dampen the consumption effects of the economy overall, so it is a good decision to combine fiscal policy and monetary policy.” he added.

When central banks act alone, without the support of fiscal policy, they need to raise interest rates substantially to combat inflation, the report says. In the framework of the “sharpest rise in inflation in three decades”, the report analyzes how inflation affects various segments of society in different places.

Based on public surveys of thousands of households in six economies (Colombia, Finland, France, Kenya, Mexico, and Senegal), the IMF found that inflation from mid-2021 to mid-2022 impacted people through three main channels. : your consumption pattern, your salary income, pensions or transfers and your assets and liabilities.

The effect was more pronounced in low-income countries, while inflation eroded real incomes in commodity-importing countries.

Also, rapidly rising food prices relative to other prices “disproportionately hurt poor families” because food accounts for a larger share of their total consumption.

The wealth redistributive effects of inflation were also influenced by the age of the household head, with young families, who tend to be net borrowers, experiencing gains through wealth channels, while households made up of the elderly saw eroded their wealth.

The report also analyzes how inflation erodes the real value of public debt. In countries with debt above 50% of GDP, the IMF calculates, each percentage point of unexpected (“surprise”) increase in inflation reduces public debt by 0.6 percentage points, an effect that lasts for several years.

However, as inflation becomes persistent and better anticipated, it stops contributing to lower debt ratios.