Cost-of-living crises fuel lasting rise in inflation expectations: IMF

Cost-of-living crises raise inflation expectations for years and cause prolonged losses in purchasing power, the International Monetary Fund (IMF) said Tuesday.

Expectations remain above pre-crisis levels long after food and energy prices initially surge, potentially complicating central banks’ efforts to control inflation, it said in a blog accompanying the research.

The findings draw on an analytical chapter of the October 2026 World Economic Outlook, whose full report is due Oct. 13.

During crises, prices of necessities rise faster than other prices and wages, making it harder for households to cut spending on essentials.

Necessities’ prices relative to other goods typically continue rising for more than a year after a crisis begins and remain persistently elevated. Real wages also fall and stay below previous levels for an extended period.

Lower-income households suffer disproportionately because food and energy account for a larger share of their spending, with substantial consequences for inequality and poverty.

Targeted support preferred

Data covering 76 countries during three decades showed governments relied heavily on broad measures to suppress prices, especially in emerging markets and low-income countries.

The IMF said targeted, temporary income transfers offer the most effective protection while preserving fiscal resources.

Consumer subsidies can require three to six times more spending than targeted transfers to provide equivalent protection. Producer subsidies can cost 14 to 22 times more.

During Europe’s 2022-23 energy crisis, less than 20 cents of each euro spent suppressing energy prices reached the poorest fifth of households.

Broad subsidies also weaken conservation incentives and can raise global prices when many countries implement them simultaneously.

Broader support should be reserved for exceptional circumstances, where fiscal space permits, and carry clear expiry provisions, said the fund.