BlackRock Investment Institute

Macro insights

IMF cautions on inflation risks

The International Monetary Fund (IMF) shares our view that the key driver of current high inflation is supply-demand mismatches due to the economic restart, according to its World Economic Outlook published last week. It has revised up its inflation forecasts – especially for 2021. They now stand well above 2% in many developed economies, led by the U.S, before dropping off in 2022. See the chart.

How should central banks respond?

Chart showing IMF inflation estimates above 2010-2019 average levels

Sources: BlackRock Investment Institute, IMF World Economic Outlook, U.S. Bureau of Labor Statistics, Statistics Canada, UK ONS, Eurostat, Japan Ministry of Internal Affairs and Communications, with data from Haver Analytics, October 2021. Note: Forecasts relate to headline consumer price inflation. The green dots show the average of calendar-year annual inflation rates between 2010-2019.

Here’s where we differ with the IMF. The IMF urges vigilance on the part of central banks, calling on them to move quickly if there are signs of inflation expectations becoming unanchored – and it advises the Fed to raise rates before the end of 2022.

We agree there’s a risk of inflation expectations becoming unanchored, but this is not our base case. We think central banks should avoid leaning against higher inflation at this time and expect they will respond in a more muted way to inflation than in the past – the key premise of our new nominal investment theme. This is why we remain pro-risk. See our September 2021 Global Outlook.

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Elga Bartsch
Head of Macro Research
Read bio
Nicholas Fawcett
Macro Research

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