Inflation assessment from IMF

IMF shared the section titled "Navigating a World Prone to Shocks: Lessons from Cost of Living Crises" of the World Economic Outlook Report to be published on October 13.

The report emphasized that the sudden increase in the cost of basic necessities during periods of cost of living crisis is quite permanent, and noted that this erodes real wages, puts pressure on domestic demand and pushes up medium-term inflation expectations.

The report points out that cost-of-living crises disproportionately affect these households more severely because low-income households allocate a much larger portion of their expenses to basic needs, and that this situation has important consequences in terms of income distribution and poverty.

The report stated that in past crisis periods, policy makers largely resorted to broad and untargeted measures, but there were significant differences between countries in this regard.

The report noted that developed economies tend to focus more on price-oriented measures and direct income supports that are closer to the final consumer, while emerging market economies and low-income developing countries are more inclined towards producer subsidies, price controls and broad-based increases in wages and pensions.

"Targeted supports should be preferred"

The report noted that the most cost-effective and effective way to protect the most vulnerable segments from price increases is targeted and temporary income transfers, and that targeted income supports facilitate the demand adjustment needed in the market by preserving price signals and secure the country's fiscal space.

The report underlined that large-scale measures that suppress prices are much more costly than targeted transfers to provide the same level of protection, and that subsidies lose their effect in cases where the country's fiscal space is limited, and when implemented by many countries at the same time, they can have the opposite effect by increasing global prices.

The report stated that policy makers should prefer temporary income supports that directly target the most vulnerable households instead of large-scale subsidies, and that it would be appropriate to limit large-scale measures only to exceptional cases where the crisis is extremely severe, it becomes difficult to identify vulnerable households, and where the fiscal space allows.