Across-the-board price controls to tame inflation could be costly, says IMF
Imposing price controls, subsidies or lower taxes across the board could be a costly approach for economies that are looking to tame rising inflation, according to the International Monetary Fund (IMF).
Many economies have adopted policy steps to address surging prices of food and energy, with more than half out of the 134 countries polled by the IMF recently saying they had announced at least one measure to limit the impact of inflation on consumers.
In several advanced markets, for example, cash and semi-cash transfers, including vouchers and utility bill discounts, have been introduced. Governments in emerging and developing countries have also rolled out lower consumption taxes.
While they can provide inflationary relief, the IMF said introducing measures that will keep prices “artificially low” for everyone, irrespective of their ability to pay, can be costly.
“Limiting the price pass-through is not always the best approach… Policymakers should allow high global prices to pass through to the domestic economy while protecting vulnerable households affected by the increases,” the lender said.
“Countries should refrain from preventing domestic prices from adjusting because such measures, which result in subsidies, are not efficient in protecting the most vulnerable. They also are costly, crowd out more productive spending and reduce producer and distributor incentives.”
A good approach would be to introduce targeted price controls so that consumers that badly need price relief can benefit.
“Countries should provide temporary and targeted transfers to most vulnerable households,” the IMF said.
“We advise allowing price pass-through on food, provided that the vulnerable are protected and food security is not at risk,” it added.
Different approach for different countries
The IMF also stressed that not all countries can have similar policies to address inflation. Policy measures can vary, depending on the strength of the country’s social safety net, the level of existing food and fuel subsidies and the availability of fiscal space.
The IMF noted that consumers in low-income economies are the ones that are most vulnerable to rising inflation, considering that food accounts for nearly half (44 percent) of consumption.
In emerging market and advanced economies, food accounts for only 28 percent and 16 percent of consumption on average.
“Countries with strong social safety nets could use targeted, temporary cash transfers to lessen the impact on vulnerable people. These countries can provide targeted transfers relying on existing social programs,” the IMF said.
