MercoPress. South Atlantic News Agency

IMF warns inflation risks have become a global challenge

Prospects for continued relatively strong growth in emerging and developing economies suggests that demand growth for energy and commodities will remain solid, even as global growth is slowing, according to the International Monetary Fund, IMF, First Deputy Managing Director John Lipsky.

In a speech at the Council on Foreign Affairs in New York Lipsky called for a strong policy response by governments around the world to address commodity supply bottlenecks and longer-term supply issues while tackling inflationary risks. Lipsky warned that the recent pickup in inflation rates around the world in part reflected the impact of higher energy and commodity prices. "This inflation speed-up must be taken seriously as it creates potentially significant challenges to economic stability that could undermine prospects for restoring the combination of solid growth and low inflation that prevailed earlier in this decade". "To put the issue starkly, inflation risks have reemerged as a global challenge following a long absence" Lipsky added. He called on governments to initiate steps to encourage investment in energy, reduce bio-fuel subsidies, and improve agricultural policies. He said the IMF was also working to help developing countries that have been worst affected by the commodity hikes and to develop strategies that can be adopted by member countries. Demand for commodities has remained robust because of strong growth in emerging and developing economies, led by China and India. These economies' growth is more energy- and commodity-intensive than that of more developed economies. In fact, emerging and developing economies as a group have accounted for about 95% of the growth in demand for oil since 2003. As spare capacity and inventories have dwindled, the oil market has become highly sensitive to news of supply disruptions and geopolitical events. This has pushed oil prices to all-time highs in real terms, surpassing their 1979 peak by some 16%. Lipsky also forecasted that food prices will remain high. "With only temporary relief likely, we expect that agricultural prices will remain high for the foreseeable future, as supply responses may require both new investment and policy reforms. This will take time". He added that hopefully "the inflationary impulse from higher food prices will wane, even if prices do not retreat significantly". Lipsky said that, in the IMF's view, policies will need to adjust both to the reality of permanent relative price shifts and, in some cases, to a broader resurgence in inflation. In a macroeconomic overview of the world's main blocks Lipsky said that in United States interest rates have been lowered significantly as the growth outlook has deteriorated. But as US growth recovers, developments in inflation and inflationary expectations will assume greater importance for policymakers. Lipsky said the 2008 fiscal stimulus should help provide some cushion for demand, however new fiscal measures could focus on stabilizing key sectors that are vital to limiting downside risks to growth, such as the housing sector and the financial system. In the Euro area the sharp rise in inflation and concerns about potential deterioration in inflationary expectations are dampening consumer confidence and spending. The inflation outlook appropriately is central to the policy considerations of the European Central Bank. Policy prospects could shift, however, if inflationary expectations remain well anchored and slowing growth reduces inflationary pressures. For Japan, core inflation remains very low at 0.1%, and given the uncertainty concerning growth prospects, Bank of Japan policy is not expected to change soon. In emerging economies whose currencies are closely linked to the dollar and that are facing overheating concerns, macroeconomic policies need to be tightened in response to generalized inflationary pressures. In China, movement toward a more flexible exchange rate regime could provide greater scope for effective and stabilizing monetary policy action. Among Middle Eastern commodity exporters, fiscal spending should be aimed at alleviating supply bottlenecksâ€"particularly related to infrastructureâ€"that have contributed to inflation pressures.