The script is always the same: inflation is peaking, relief is coming, the numbers are bending back down. This week, the International Monetary Fund broke it.
New IMF research, published October 6 as an analytical chapter of its October World Economic Outlook, reaches a bleaker conclusion. When prices for food and energy surge, the damage does not wash out after a few months of high inflation. It leaves a lasting mark on what ordinary people can afford.
The Fund’s economists — Braulio Britos, Chiara Maggi, Galip Kemal Ozhan and Sihwan Yang — found that prices of necessities relative to everything else keep climbing for more than a year after a typical episode begins, and stay elevated long after the headline inflation rate starts falling. “As a result, people face not only a temporary spike in food and energy costs, but a lasting deterioration in the affordability of essentials relative to other items,” the IMF wrote in a blog post accompanying the report.
The inflation the official number misses
The most unsettling finding is not about averages — it is about who lives inside them. Poorer households spend far more of their budgets on food and fuel, so they live with a higher rate of inflation than the one governments publish.
The IMF built a new model to account for that gap: a 0.8 percentage-point difference from the standard inflation measure — enough, the Fund says, to put 23 million more people below the extreme poverty line between 2021 and 2024 than earlier calculations suggested.
“In a nutshell, cost-of-living crises … impact price stability, they reduce living standards and they worsen inequality,” Chiara Maggi, the IMF economist who co-led the research, told Reuters.
Two more scars are documented in the paper. Real wages fall during these episodes and stay below their previous levels for an extended period — pay does not just pause, it retreats. And inflation expectations rise and remain above pre-crisis levels for years, which the Fund warns could complicate central banks’ efforts to keep prices under control.
The wrong medicine, at the worst possible time
Drawing on data from 76 countries over three decades, the IMF looked at what governments actually do when prices spike — and the answer is discouraging. The instinctive political reflex, broad subsidies that suppress prices for everyone, is staggeringly wasteful.
Giving lower-income families the same protection through consumer subsidies can cost three to six times more than targeted transfers, the Fund estimates. Subsidizing producers is worse: 14 to 22 times more expensive. During Europe’s 2022–23 energy crisis, less than 20 cents of every euro spent suppressing electricity, gas and gasoline prices reached the poorest fifth of households.
Blanket subsidies leak money, dull the price signals that encourage conservation, and — when many countries deploy them at once — can push global prices even higher. The IMF’s prescription is targeted, temporary income transfers through existing social protection systems.
The cruel twist: the countries where these measures are needed most are the least able to afford them. After five years of repeated shocks — the pandemic supply crunch, Russia’s invasion of Ukraine in 2022, and this year’s Middle East conflict, which shut a key Gulf supply route and sent energy and fertilizer prices soaring — many low-income economies have little fiscal space left.
Two forces pulling the world apart
The warning arrives alongside a darker assessment from the top of the institution. In a speech in Singapore on October 7 previewing next week’s IMF and World Bank Annual Meetings in Bangkok, Managing Director Kristalina Georgieva said the global economy is being pulled in two directions: a negative energy supply shock from the Middle East conflicts, and a positive demand shock from the AI boom that is also feeding inflation.
“The combined impact of these two forces is highly uneven across the world,” Georgieva said — the AI boom bypassing much of the world even as energy costs hammer it.
The numbers in her speech were stark. Oil is stuck around $100 a barrel — well above the $89 the Fund’s July forecast assumed for 2026 — with impaired refining capacity adding another $100 in crack-spread margins per barrel on key products including diesel. Winter heating demand is approaching while gas supplies stay constrained by threats to Hormuz shipping. Global public debt is on track to exceed 100 percent of GDP, its highest level since the end of World War II.
New growth forecasts due in Bangkok will carry their biggest downgrades in war-ravaged economies — Ukraine, its civilian and economic infrastructure badly damaged, and Gulf countries hit by Iranian strikes and collapsing energy exports.
What happens next
The picture is clear: the affordability crisis is no longer a chapter of the pandemic story. It is becoming a structural feature of a world where commodity shocks recur — and where governments’ favorite responses are too blunt and too costly.
For central banks, sticky inflation expectations are a warning against declaring victory early. Rates will have to stay higher for longer, with all the pain that implies. For governments, the message is that the political reflex — subsidize everything for everyone — is the one thing they can no longer afford.
The Fund’s honesty here is refreshing but damning. We can measure inflation precisely, print it on a chart, and still miss the version of it that 23 million people are living. Prices eventually come down. Affordability, the IMF is now telling us, does not come back on its own.
2 Comments