Entrenched supply crunch stoking inflation risks throttling global economy, IMF warns

Supply chain breakdowns stoking inflation are inflicting “harm” on the global recovery from the Covid-19 crisis, the world’s economic watchdog warned today.

Swelling costs fuelled by choking supply bottlenecks pose a serious risk to derailing the economic rebound by cutting households’ spending power, the International Monetary Fund (IMF) has warned.

Central banks launching a rapid tightening of monetary policy to tame inflation will add to the cost of living crunch squeezing households.

“A large and sustained rise in costs due to bottlenecks can harm the recovery, both by lifting consumer prices and cutting into households’ purchasing power, and indirectly by leading central banks to tighten monetary policy sooner to prevent inflation expectations from shifting above target,” the IMF said.

Inflation in the UK is running at its highest level in nearly 30 years at 5.5 per cent, leading economists to sweat over a possible slowdown in economic growth this year amid a historic squeeze on living standards.

The Resolution Foundation estimates that if inflation were to hit an expected 7.25 per cent peak in April forecasted by the Bank of England, households’ real disposable income would fall at the steepest rate since the late 1940s.

The Bank, like other top central banks around the world, is expected to look through slowing economic growth and hike interest rates quickly this year to tame runaway inflation.

Goldman Sachs expects Threadneedle Street to send rates to 1.75 per cent by the winter, taking them to the highest level since 2008.

Central banks are walking on a thin tightrope that could snap if they pull monetary policy levers at the wrong time.

The likes of the BoE, US Federal Reserve and the European Central Bank must balance sustaining a “still-incomplete recovery and ensure that output catches up with its pre-pandemic trend without allowing wages and prices to spiral upwards,” the IMF said.

The global logistics system has buckled under the weight of a sudden sharp rise in demand triggered by countries trying to get their economies back to full-strength after scrapping Covid-19 curbs.

A rotation away from spending on services amid lockdowns to goods has swelled ports’ order books, resulting in “severe congestion with shipping volumes running above pre-pandemic levels and pandemic restrictions interrupting activity,” the IMF said.

Sectors that rely on pulling together multiple components to produce finished goods have been hardest hit by the supply crunch.

Production of new cars has plummeted since the onset of the Covid-19 crisis as a result of a scarcity of semiconductors.