What are the solutions for stabilizing inflation? | Experts’ Opinions

For the past few months with every visit to the grocery store, each stop at the gas station, and every paid bill, our wallets became emptier at an alarming rate. Inflation is the word on everybody’s lips these days, currently being one of the biggest international development challenges. In May, the price index rose again mainly because of surging energy and food prices, partly due to the impact of the war in Ukraine. Russia’s invasion of its neighboring country continues to weigh on the world economy by disrupting trade leading to shortages of materials and contributing to high energy and commodity prices. The problem is clear but… what are the solutions?

What measures should be taken by the international community to manage hyperinflation?

“The international community, especially the International Monetary Fund (IMF), must be prepared to increase liquidity support or lending to emerging and low-income countries. In this respect, the IMF can strengthen global resilience to current and future crises by increasing the availability of its resources, providing more debt relief, and preventing the crises from spreading. Although the drivers of inflation are, in many cases, beyond the control of central banks (the pandemic, the war, sanctions, supply chain disruptions, etc.), price pressures are increasingly broad-based. The transmission of the shockwaves caused by the war will vary across countries, depending on trade and financial linkages, exposure to commodity price increases, and the strength of the pre-existing inflation surge. The appropriate monetary policy response by central banks will, therefore, differ across economies. In some countries, including developed economies, inflationary pressure has strengthened considerably and become more broad-based, sustained by strong policy support. In other countries, the prominence of fuel and war-affected commodities in local consumption baskets could lead to broader and more persistent price pressures. In both cases, tighter monetary policy will be required and appropriate. Interest rates are expected to rise as central banks tighten monetary policy, exerting pressure on emerging markets and developing economies. In conclusion, in countries where the harmful effects from the war are larger, the trade-off between safeguarding growth and containing inflation will remain more challenging. Central banks around the world should remain vigilant to the impact of price pressures on inflation expectations and continue to communicate clearly on the outlook for inflation and monetary policy. Here, a well-informed dependent approach to adjusting forward guidance on the monetary stance is the key to maintaining the credibility of monetary policy. Worsening supply-demand imbalances and further increases in commodity prices could lead to persistently high inflation, rising inflation expectations, and stronger wage increases. If clear signs emerge and indicate that inflation will continue to be high over the medium term, central banks will be required to react or respond faster than currently anticipated, raising interest rates and exposing debt vulnerabilities. Authorities should be vigilant regarding private sector vulnerabilities to rising interest rates. Moreover, beyond the immediate challenges of the Russia-Ukraine war and the pandemic, policymakers should not lose sight of longer-term goals.”

“The current inflation is being driven by the “helicopter money” and “negative interest rates” policies of the developed world over the past 13 years. Rising food and energy prices due to Russia’s aggression against Ukraine is an accelerating and congruent factor, but prices had started to “go north” before the war broke out. The Western world must scale up what they began to do three to five months ago. On the one hand, central banks must be supported to normalize interest rates, even if this leads to a temporary global recession. On the other hand, developed countries must force Russia to stop the war against Ukraine through sanctions and military help to Ukraine. In both cases, Western voters should be persuaded that there will be a cost to be shared with Ukraine. Until then, developed countries need to take immediate action to fight the risk of famine in some countries in Africa and Asia due to Russia’s blockade of Ukrainian grain supplies. Preparations for large-scale humanitarian aid should have already begun. Sometimes, for things to get better, they must first become worse. For now, all risks are on the negative side.”

“The international community can urge governments around the world to take the following steps: 1) Increase production output: governments should adopt policies that can relieve entrepreneurs. With the higher number of goods circulating in the community, the circulation of money will be faster and more plentiful so that the money in circulation becomes balanced again; 2) Facilitate the entry of imported goods: not all goods can be fulfilled by domestic producers and in view of that facilitating the entry of imported goods is one solution to meet domestic needs. This can be done by reducing taxes and also facilitating the licensing of imported goods; 3) Stabilizing income (or wage control): keeping people’s income from rising can also be one way to suppress uncontrolled inflation; 4) Setting price ceilings: when inflation occurs, the price of goods tends to rise uncontrollably. This is what causes the purchasing power of people decrease. By setting price ceilings, the government can hope that people’s purchasing power will improve. This however, can lead to a different set of problems; 5) Stricter control of goods’ distribution: The hampered distribution of goods is also a factor in rising prices in an area. Large demand is not matched by the limited number of goods due to the delay in the distribution of goods.”

“The way to contain price increases is to remove all unnecessary barriers to trade. When trade can take place, resources are allocated to their best uses, having the effect of reducing prices. Climate disasters are not man-made but will be unless climate change is reined in. Again, much of the answer to climate change will be found in removing barriers to innovation particularly in renewable energy. The pandemic will remain a problem all the time it is allowed to run its course in slowly developing countries without access to modern medicines. Efforts need to be redoubled to avoid the human catastrophe of allowing pandemics to fester and renew itself in the poor countries of the World. ”

The high-level of inflation, especially food prices, is affecting the livelihoods of poor families with vulnerable income, especially those engaged in microenterprises, informal business, and employees with fixed weekly or monthly income. While there are obviously people who may need direct support (e.g., through government safety net programs), others could be supported through a more sustainable social and economic system. This can be through facilitating their engagement in business, facilitating the business environment (both locally and at the international level), availing more flexible access to financial services and business development support locally, etc. Constraints on foreign exchange are becoming critical (limiting production capacities, enterprises in agriculture and manufacturing which are dependent on imported inputs), and this can be partly eased through supporting exporters to access international markets.”

“Government policies aimed at removing supply rigidities, increasing productivity and enhancing economic growth would help to slow down the price increases. Another solution is the rescheduling of debt accumulated during the pandemic period to ease the fiscal space.”

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