Inflation Risks Have Reemerged

• Pages: 85-86

Page 85

IMF First Deputy Managing Director John Lipsky has 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 in a May 8 speech at the Council on Foreign Relations in New York that the recent pickup in inflation 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," he said.

Demand for commodities has remained robust because of strong growth in emerging and developing economies, led by China and India, whose growth is more energy-and commodity-intensive than that of more developed economies.

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 Page 86 to all-time highs in real terms, surpassing their 1979 peak by some 16 percent.

The IMF also forecasts that food prices will remain high.

Policy responses

Lipsky said that, in the IMF's view, policies must adjust both to the reality of permanent relative price shifts and, in some cases, to a broader resurgence in inflation.

Advanced, emerging, and developing economies alike have a role to play in ensuring that policies do not hinder the restoration of demand-supply balances in commodities markets. He identified a number of appropriate structural policy responses:

* Promoting a demand response while cushioning vulnerable groups. Given that some portion of the latest increases in oil prices appears to be durable, allowing a demand response to the reality of higher oil prices will be crucial. Indeed, the pass-through of changes in international oil prices to domestic prices would help promote an inevitable demand response to changing market conditions and encourage conservation. At the same time, well-targeted policy supports should be put in place to protect the most vulnerable groups.

* Encouraging investment in the oil sector. Policies are needed to foster greater investment in oil. These include efforts by oil producers-particularly those in emerging and developing countries-to ensure that...