Countering the Cost of Living Crisis 

Countering the Cost of Living Crisis

Loading

Countering the Cost of Living Crisis

Inflation and Uncertainty
Central Banks Tackle Stubbornly High Inflation
War in Ukraine Causes More Human Suffering and Economic Damage
COVID-19 Continues to Hold Back Economic Progress
The Forecast: Output Lower Still, but Inflation Peaking
Risks to the Outlook: The Downside Still Dominates
Policy Actions: From Inflation to Growth
Box 1.1. Dissecting Recent WEO Inflation Forecast Errors
Box 1.2. Market Power and Inflation during COVID-19
Box 1.3. Risk Assessment around the World Economic Outlook Baseline Projection
Special Feature: Market Developments and Food Price Inflation Drivers
References
Chapter 2. Wage Dynamics Post–COVID-19 and Wage-Price Spiral Risks

1
2
6
7
8
16
20
26
30
33
37
48
51

Introduction
Historical Episodes Similar to Today
Wage Drivers during the COVID-19 Shock and Recovery
Inflation De-anchoring: Expectations and Policy Responses
Conclusions
Box 2.1. Pass-Through from Wages to Prices: Estimates from the United States
References
Chapter 3. Near-Term Macroeconomic Impact of Decarbonization Policies

51
54
56
61
66
68
69
71

Introduction
Decarbonizing the Economy: Now Is the Time to Become Credible
Climate Policies to Keep Paris within Reach
Credible Policies: Key for a Successful Transition
Transition Costs under Further Delays
Conclusions and Policy Implications
Box 3.1. Near-Term Implications of Carbon Pricing: A Review of the Literature
Box 3.2. Political Economy of Carbon Pricing: Experiences from South Africa, Sweden,
and Uruguay
Box 3.3. Decarbonizing the Power Sector while Managing Renewables’ Intermittence
References
International Monetary Fund | October 2022

71
74
75
80
83
84
86
89
91
93
iii

WORLD ECONOMIC OUTLOOK: COUNTERING THE COST?OF?LIVING CRISIS

Statistical Appendix
Assumptions
What’s New
Data and Conventions
Country Notes
Classification of Countries
General Features and Composition of Groups in the World Economic Outlook
Classification
Table A. Classification by World Economic Outlook Groups and Their Shares in
Aggregate GDP, Exports of Goods and Services, and Population, 2021
Table B. Advanced Economies by Subgroup
Table C. European Union
Table D. Emerging Market and Developing Economies by Region and Main Source
of Export Earnings
Table E. Emerging Market and Developing Economies by Region, Net External Position,
Heavily Indebted Poor Countries, and per Capita Income Classification
Table F. Economies with Exceptional Reporting Periods
Table G. Key Data Documentation
Box A1. Economic Policy Assumptions Underlying the Projections for Selected Economies
List of Tables
Output (Tables A1–A4)
Inflation (Tables A5–A7)
Financial Policies (Table A8)
Foreign Trade (Table A9)
Current Account Transactions (Tables A10–A12)
Balance of Payments and External Financing (Table A13)
Flow of Funds (Table A14)
Medium-Term Baseline Scenario (Table A15)

97
97
97
98
99
101
101
103
104
104
105
106
108
109
119
124
125
132
137
138
140
147
151
154

World Economic Outlook Selected Topics

155

IMF Executive Board Discussion of the Outlook, September 2022

165

Tables
Table 1.1. Overview of the World Economic Outlook Projections
Table 1.2. Overview of the World Economic Outlook Projections at
Market Exchange Rate Weights
Table 1.SF.1. Oil, Cereal, and Food Price Boom Phases
Table 1.SF.2. Oil-Cereal Price Correlation
Annex Table 1.1.1. European Economies: Real GDP, Consumer Prices,
Current Account Balance, and Unemployment
Annex Table 1.1.2. Asian and Pacific Economies: Real GDP, Consumer Prices,
Current Account Balance, and Unemployment
Annex Table 1.1.3. Western Hemisphere Economies: Real GDP, Consumer Prices,
Current Account Balance, and Unemployment
Annex Table 1.1.4. Middle East and Central Asia Economies: Real GDP,
Consumer Prices, Current Account Balance, and Unemployment
Annex Table 1.1.5. Sub-Saharan African Economies: Real GDP, Consumer Prices,
Current Account Balance, and Unemployment
Annex Table 1.1.6. Summary of World Real per Capita Output
Table 3.1. Three Policy Packages Reducing Emissions by 25 Percent in 2030
Table 3.1.1. Cross-Model Comparison of Changes in GDP
iv

International Monetary Fund | October 2022

9
11
39
39
42
43
44
45
46
47
79
87

CONTENTS

Online Tables—Statistical Appendix
Table B1. Advanced Economies: Unemployment, Employment, and Real GDP per Capita
Table B2. Emerging Market and Developing Economies: Real GDP
Table B3. Advanced Economies: Hourly Earnings, Productivity, and Unit Labor
Costs in Manufacturing
Table B4. Emerging Market and Developing Economies: Consumer Prices
Table B5. Summary of Fiscal and Financial Indicators
Table B6. Advanced Economies: General and Central Government
Net Lending/Borrowing and General Government Net Lending/Borrowing
Excluding Social Security Schemes
Table B7. Advanced Economies: General Government Structural Balances
Table B8. Emerging Market and Developing Economies: General Government
Net Lending/Borrowing and Overall Fiscal Balance
Table B9. Emerging Market and Developing Economies: General Government
Net Lending/Borrowing
Table B10. Selected Advanced Economies: Exchange Rates
Table B11. Emerging Market and Developing Economies: Broad Money Aggregates
Table B12. Advanced Economies: Export Volumes, Import Volumes, and Terms of
Trade in Goods and Services
Table B13. Emerging Market and Developing Economies by Region: Total Trade in Goods
Table B14. Emerging Market and Developing Economies by Source of
Export Earnings: Total Trade in Goods
Table B15. Summary of Current Account Transactions
Table B16. Emerging Market and Developing Economies: Summary of
External Debt and Debt Service
Table B17. Emerging Market and Developing Economies by Region:
External Debt by Maturity
Table B18. Emerging Market and Developing Economies by
Analytical Criteria: External Debt by Maturity
Table B19. Emerging Market and Developing Economies: Ratio of External Debt to GDP
Table B20. Emerging Market and Developing Economies: Debt-Service Ratios
Table B21. Emerging Market and Developing Economies, Medium-Term
Baseline Scenario: Selected Economic Indicators
Figures
Figure 1.1. Leading Indicators Show Signs of Slowdown
Figure 1.2. Change in Monetary Policy Cycle among G20 Economies
Figure 1.3. EMDE Sovereign Spreads
Figure 1.4. Wholesale Food and Fuel Prices Expected to Moderate
Figure 1.5. Mean Land Temperature
Figure 1.6. Core Inflation and Its Distribution across Countries
Figure 1.7. Inflation Hits the Poorest Hardest
Figure 1.8. Rebalancing of Demand: Goods versus Services
Figure 1.9. Inflation Driven by Food and Fuel
Figure 1.10. Real Short-Term Rates Are Rising
Figure 1.11. A Transatlantic Divergence
Figure 1.12. Russian Pipeline Gas Supplies to EU by Route
Figure 1.13. New Confirmed COVID-19 Deaths
Figure 1.14. Countries in Contraction as a Share of Global GDP, 2022–23
Figure 1.15. Global Growth and Inflation Forecasts
Figure 1.16. The Shocks of 2022: Persistent Output Losses
International Monetary Fund | October 2022

2
2
3
3
3
3
4
4
4
6
6
7
7
11
11
13
v

WORLD ECONOMIC OUTLOOK: COUNTERING THE COST?OF?LIVING CRISIS

Figure 1.17. Scarring from the Pandemic
Figure 1.18. Inflation Likely to Decline Next Year
Figure 1.19. Current Account and International Investment Positions
Figure 1.20. Corporate Talk of Key Macroeconomic Risks
Figure 1.21. Long-Term Inflation Expectations
Figure 1.22. Africa Least Vaccinated against COVID-19
Figure 1.23. Slowdown in China
Figure 1.24. Natural Rate of Interest, United States
Figure 1.25. Broad-Based Dollar Appreciation
Figure 1.26. Change in Cyclically Adjusted Primary Balance
Figure 1.27. Debt in Distress in Emerging Market and Developing Economies
Figure 1.1.1. Headline Inflation Forecasts
Figure 1.1.2. WEO Annual Headline Forecast Errors with Respect to
Preceding January WEO Updates
Figure 1.1.3. Core Inflation and Output Forecast Errors
Figure 1.1.4. Impacts on Core Inflation Forecast Errors
Figure 1.2.1. Decomposition of GDP Deflator Growth by Income Components
Figure 1.2.2. Sales-Weighted Markups and CPI for Selected Advanced Economies
Figure 1.2.3. Coefficient of Production Costs Pass-Through to Prices
Figure 1.3.1. Distribution of World GDP Growth Forecast
Figure 1.3.2. Impact of Downside Scenario on GDP and Inflation
Figure 1.SF.1. Commodity Market Developments
Figure 1.SF.2. Russian Gas Exports and Prices
Figure 1.SF.3. Selected Commodity Price Indices
Figure 1.SF.4. Response of Cereal Prices to Major Drivers
Figure 1.SF.5. Response of Food CPI to International Food Price Shock
Figure 1.SF.6. Conditional Forecast Domestic Food Price Inflation
Figure 2.1. Recent Wage, Price, and Unemployment Dynamics
Figure 2.2. Changes in Wages, Prices, and Unemployment after Similar Past Episodes
Figure 2.3. Changes in Wages, Prices, and Unemployment after Past Episodes with
Accelerating Prices and Wages
Figure 2.4. A Look at Nominal Wage Growth through the Lens of the
Wage Phillips Curve
Figure 2.5. The Role of Structural Characteristics in Wage Dynamics
Figure 2.6. Drivers of Changes in Wages, Prices, and Employment during the
COVID-19 Pandemic and Recovery
Figure 2.7. Cumulative Effects of Supply Chain Pressures and Monetary Tightening on
Wages and Prices
Figure 2.8. Cumulative Effects of Supply Chain Pressures on Inflation Expectations
Figure 2.9. Near-Term Scenarios with Set Interest Rate Path under Different Expectations
Figure 2.10. Optimal Policy Scenario under Adaptive Learning Expectations
Figure 2.1.1. Pass-Through from Wages to Prices
Figure 3.1. Historical and Projected Global Emissions
Figure 3.2. Macroeconomic Impact in 2030 of a GHG Tax under
Different Calibrations of Elasticities
Figure 3.3. Macroeconomic Impact of Different Recycling Options in the United States
Figure 3.4. Macroeconomic Impact of the Three Policy Packages in
Regions in the Simulation
Figure 3.5. Impact in 2030 of Fully and Partially Credible Mitigation Policies
Figure 3.6. Macroeconomic Impact of Different Monetary Policy Targets in the
United States
vi

International Monetary Fund | October 2022

14
15
16
16
17
19
20
21
22
22
23
26
27
27
28
30
31
31
34
35
37
38
39
40
40
41
52
55
56
57
58
60
63
64
65
66
68
74
77
78
80
81
82

CONTENTS

Figure 3.7. Macroeconomic Impact of Different Monetary Policy Targets under
Wage Indexation
Figure 3.8. Gradual and Delayed GHG Mitigation Policies in the United States
Figure 3.1.1. Carbon Pricing in 2022 for Selected Economies
Figure 3.2.1. Carbon Price in Sweden
Figure 3.2.2. Carbon Price and Emissions Coverage, 2022
Figure 3.3.1. Monthly Wholesale Electricity Prices in Selected European Economies
Figure 3.3.2. Daily Electricity Prices in Selected European Countries as a Function of
Share of Renewables in Power Production

International Monetary Fund | October 2022

83
84
86
89
90
91
92

vii

WORLD
WORLDECONOMIC
ECONOMIC
OUTLOOK:
OUTLOOK:
TENSIONS
COUNTERING
FROM THE TWO?SPEED
THE COST?OF?LIVING
RECOVERY CRISIS

ASSUMPTIONS AND CONVENTIONS

A number of assumptions have been adopted for the projections presented in the World Economic Outlook
(WEO). It has been assumed that real effective exchange rates remained constant at their average levels during
July 22, 2022, to August 19, 2022, except for those for the currencies participating in the European exchange rate
mechanism II, which are assumed to have remained constant in nominal terms relative to the euro; that established
policies of national authorities will be maintained (for specific assumptions about fiscal and monetary policies for
selected economies, see Box A1 in the Statistical Appendix); that the average price of oil will be $98.19 a barrel in
2022 and $85.52 a barrel in 2023; that the three-month government bond yield for the United States will average
1.8 percent in 2022 and 4.0 percent in 2023, for the euro area will average –0.2 percent in 2022 and 0.8 percent
in 2023, and for Japan will average –0.1 percent in 2022 and 0.0 percent in 2023; and that the 10-year government
bond yield for the United States will average 3.2 percent in 2022 and 4.4 percent in 2023, that for the euro area
will average 0.9 percent in 2022 and 1.3 percent in 2023, and that for Japan will average 0.2 percent in 2022 and
0.3 percent in 2023. These are, of course, working hypotheses rather than forecasts, and the uncertainties surrounding them add to the margin of error that would, in any event, be involved in the projections. The estimates
and projections are based on statistical information available through September 26, 2022.
The following conventions are used throughout the WEO:
• …

to indicate that data are not available or not applicable;

• – between years or months (for example, 2021–22 or January–June) to indicate the years or months covered,
including the beginning and ending years or months; and
• /

between years or months (for example, 2021/22) to indicate a fiscal or financial year.

• “Billion” means a thousand million; “trillion” means a thousand billion.
• “Basis points” refers to hundredths of 1 percentage point (for example, 25 basis points are equivalent to ¼ of 1
percentage point).
• Data refer to calendar years, except in the case of a few countries that use fiscal years. Please refer to Table F in
the Statistical Appendix, which lists the economies with exceptional reporting periods for national accounts and
government finance data for each country.
• For some countries, the figures for 2021 and earlier are based on estimates rather than actual outturns. Please
refer to Table G in the Statistical Appendix, which lists the latest actual outturns for the indicators in the
national accounts, prices, government finance, and balance of payments for each country.
What is new in this publication:
• For Algeria, starting with the October 2022 WEO, total government expenditure and net lending/borrowing
include net lending by the government, which mostly reflects support to the pension system and other public
sector entities.
• Ecuador’s fiscal sector projections, which were previously omitted because of ongoing program review discussions, are now included.
• Tunisia’s forecast data, which were previously omitted because of ongoing technical discussions pending potential
program negotiations, are now included.
• Turkey is now referred to as Türkiye.
• For Sri Lanka, certain projections for 2023–27 are excluded from publication owing to ongoing discussions on
sovereign debt restructuring, following the recently reached staff-level agreement on an IMF-supported program.
• For Venezuela, following methodological upgrades, historical data have been revised from 2012 onward. Nominal
variables that were omitted from publication in the April 2022 WEO are now included.
viii

International Monetary Fund | October 2022

ASSUMPTIONS AND CONVENTIONS

In the tables and figures, the following conventions apply:
• Tables and figures in this report that list their source as “IMF staff calculations” or “IMF staff estimates” draw
on data from the WEO database.
• When countries are not listed alphabetically, they are ordered on the basis of economic size.
• Minor discrepancies between sums of constituent figures and totals shown reflect rounding.
• Composite data are provided for various groups of countries organized according to economic characteristics or
region. Unless noted otherwise, country group composites represent calculations based on 90 percent or more of
the weighted group data.
• The boundaries, colors, denominations, and any other information shown on maps do not imply, on the part of
the IMF, any judgment on the legal status of any territory or any endorsement or acceptance of such boundaries.
As used in this report, the terms “country” and “economy” do not in all cases refer to a territorial entity that is
a state as understood by international law and practice. As used here, the term also covers some territorial entities
that are not states but for which statistical data are maintained on a separate and independent basis.

International Monetary Fund | October 2022

ix

WORLD
WORLDECONOMIC
ECONOMIC
OUTLOOK:
OUTLOOK:
TENSIONS
COUNTERING
FROM THE TWO?SPEED
THE COST?OF?LIVING
RECOVERY CRISIS

FURTHER INFORMATION

Corrections and Revisions
The data and analysis appearing in the World Economic Outlook (WEO) are compiled by the IMF staff at the
time of publication. Every effort is made to ensure their timeliness, accuracy, and completeness. When errors are
discovered, corrections and revisions are incorporated into the digital editions available from the IMF website and
on the IMF eLibrary (see below). All substantive changes are listed in the online table of contents.

Print and Digital Editions
Print
Print copies of this WEO can be ordered from the IMF bookstore at imfbk.st/512000.

Digital
Multiple digital editions of the WEO, including ePub, enhanced PDF, and HTML, are available on the
IMF eLibrary at http://www.elibrary.imf.org/OCT22WEO.
Download a free PDF of the report and data sets for each of the charts therein from the IMF website at
www.imf.org/publications/weo or scan the QR code below to access the WEO web page directly:

Copyright and Reuse
Information on the terms and conditions for reusing the contents of this publication are at www.imf.org/external/
terms.htm.

x

International Monetary Fund | October 2022

DATA

This version of the World Economic Outlook (WEO) is available in full through the IMF eLibrary (www.elibrary.
imf.org) and the IMF website (www.imf.org). Accompanying the publication on the IMF website is a larger compilation of data from the WEO database than is included in the report itself, including files containing the series most
frequently requested by readers. These files may be downloaded for use in a variety of software packages.
The data appearing in the WEO are compiled by the IMF staff at the time of the WEO exercises. The historical data and projections are based on the information gathered by the IMF country desk officers in the context
of their missions to IMF member countries and through their ongoing analysis of the evolving situation in each
country. Historical data are updated on a continual basis as more information becomes available, and structural
breaks in data are often adjusted to produce smooth series with the use of splicing and other techniques. IMF
staff estimates continue to serve as proxies for historical series when complete information is unavailable. As a
result, WEO data can differ from those in other sources with official data, including the IMF’s International
Financial Statistics.
The WEO data and metadata provided are “as is” and “as available,” and every effort is made to ensure their
timeliness, accuracy, and completeness, but these cannot be guaranteed. When errors are discovered, there is a
concerted effort to correct them as appropriate and feasible. Corrections and revisions made after publication are
incorporated into the electronic editions available from the IMF eLibrary (www.elibrary.imf.org) and on the IMF
website (www.imf.org). All substantive changes are listed in detail in the online tables of contents.
For details on the terms and conditions for usage of the WEO database, please refer to the IMF Copyright and
Usage website (www.imf.org/external/terms.htm).
Inquiries about the content of the WEO and the WEO database should be sent by mail, or online forum
(telephone inquiries cannot be accepted):
World Economic Studies Division
Research Department
International Monetary Fund
700 19th Street, NW
Washington, DC 20431, USA
Online Forum: www.imf.org/weoforum

International Monetary Fund | October 2022

xi

WORLD
WORLDECONOMIC
ECONOMIC
OUTLOOK:
OUTLOOK:
TENSIONS
COUNTERING
FROM THE TWO?SPEED
THE COST?OF?LIVING
RECOVERY CRISIS

PREFACE

The analysis and projections contained in the World Economic Outlook are integral elements of the IMF’s
surveillance of economic developments and policies in its member countries, of developments in international
financial markets, and of the global economic system. The survey of prospects and policies is the product of a
comprehensive interdepartmental review of world economic developments, which draws primarily on information
the IMF staff gathers through its consultations with member countries. These consultations are carried out
in particular by the IMF’s area departments—namely, the African Department, Asia and Pacific Department,
European Department, Middle East and Central Asia Department, and Western Hemisphere Department—
together with the Strategy, Policy, and Review Department; the Monetary and Capital Markets Department; and
the Fiscal Affairs Department.
The analysis in this report was coordinated in the Research Department under the general direction of PierreOlivier Gourinchas, Economic Counsellor and Director of Research. The project was directed by Petya Koeva
Brooks, Deputy Director, Research Department, and Daniel Leigh, Division Chief, Research Department.
The primary contributors to this report are Silvia Albrizio, Jorge Alvarez, Philip Barrett, Mehdi Benatiya
Andaloussi, John Bluedorn, Christian Bogmans, Benjamin Carton, Christopher Evans, Allan Dizioli, NielsJakob Hansen, Florence Jaumotte, Christoffer Koch, Toh Kuan, Dirk Muir, Jean-Marc Natal, Diaa Noureldin,
Augustus J. Panton, Andrea Pescatori, Ervin Prifti, Alexandre Sollaci, Martin Stuermer, Nico Valckx, Simon Voigts,
and Philippe Wingender.
Other contributors include Michael Andrle, Gavin Asdorian, Jared Bebee, Rachel Brasier, Moya Chin, Yaniv
Cohen, Federico Díez, Wenchuan Dong, Angela Espiritu, Rebecca Eyassu, Ziyan Han, Jinjin He, Youyou Huang,
Eduard Laurito, Jungjin Lee, Li Lin, Li Longj, Yousef F. Nazer, Cynthia Nyanchama Nyakeri, Emory Oakes,
Myrto Oikonomou, Clarita Phillips, Carlo Pizzinelli, Rafael Portillo, Evgenia Pugacheva, Tianchu Qi, Yiyuan Qi,
Aneta Radzikowski, Max Rozycki, Muhammad Ahsan Shafique, Nicholas Tong, Yarou Xu, Jiaqi Zhao, and Canran
Zheng.
Joseph Procopio from the Communications Department led the editorial team for the report, with production
and editorial support from Michael Harrup, and additional assistance from Lucy Scott Morales, James Unwin,
Harold Medina (and team), The Grauel Group, and TalentMEDIA Services.
The analysis has benefited from comments and suggestions by staff members from other IMF departments as
well as by Executive Directors following their discussion of the report on September 29, 2022. However, estimates,
projections, and policy considerations are those of the IMF staff and should not be attributed to Executive
Directors or to their national authorities.

xii

International Monetary Fund | October 2022

FOREWORD

As storm clouds gather, policymakers need to keep
a steady hand.
The global economy continues to face steep
challenges, shaped by the lingering effects of three
powerful forces: the Russian invasion of Ukraine, a
Cost of Living crisis caused by persistent and broadening inflation pressures, and the slowdown in China.
Our latest forecasts project global growth to remain
unchanged in 2022 at 3.2 percent and to slow to
2.7 percent in 2023—0.2 percentage points lower
than the July forecast—with a 25 percent probability
that it could fall below 2 percent. More than a third
of the global economy will contract this year or next,
while the three largest economies—the United States,
the European Union, and China—will continue to
stall. In short, the worst is yet to come, and for many
people 2023 will feel like a recession.
Russia’s invasion of Ukraine continues to powerfully
destabilize the global economy. Beyond the escalating
and senseless destruction of lives and livelihoods,
it has led to a severe energy crisis in Europe that
is sharply increasing costs of living and hampering
economic activity. Gas prices in Europe have increased
more than four-fold since 2021, with Russia cutting
deliveries to less than 20 percent of their 2021 levels,
raising the prospect of energy shortages over the next
winter and beyond. More broadly, the conflict has also
pushed up food prices on world markets, despite the
recent easing after the Black Sea grain deal, causing
serious hardship for low-income households worldwide, and especially so in low-income countries.
Persistent and broadening inflation pressures have
triggered a rapid and synchronized tightening of monetary conditions, alongside a powerful appreciation of
the US dollar against most other currencies. Tighter
global monetary and financial conditions will work
their way through the economy, weighing demand
down and helping to gradually subjugate inflation.
So far, however, price pressures are proving quite stubborn and a major source of concern for policymakers.
We expect global inflation to peak in late 2022 but to
remain elevated for longer than previously expected,
decreasing to 4.1 percent by 2024.

In China, the frequent lockdowns under its zero
COVID policy have taken a toll on the economy,
especially in the second quarter of 2022. Furthermore,
the property sector, representing about one-fifth of
economic activity in China, is rapidly weakening.
Given the size of China’s economy and its importance
for global supply chains, this will weigh heavily on
global trade and activity.
The external environment is already very challenging for many emerging market and developing
economies. The sharp appreciation of the US dollar
adds significantly to domestic price pressures and to
the Cost of Living crisis for these countries. Capital
flows have not recovered, and many low-income and
developing economies remain in debt distress. The
2022 shocks will re-open economic wounds that were
only partially healed following the pandemic.
Downside risks to the outlook remain elevated,
while policy trade-offs to address the Cost of Living
crisis have become acutely challenging. The risk of
monetary, fiscal, or financial policy miscalibration
has risen sharply at a time when the world economy
remains historically fragile and financial markets are
showing signs of stress.
Increasing price pressures remain the most immediate threat to current and future prosperity by squeezing
real incomes and undermining macroeconomic stability.
Central banks around the world are now laser-focused
on restoring price stability, and the pace of tightening
has accelerated sharply. There are risks of both underand over-tightening. Under-tightening would entrench
further the inflation process, erode the credibility of
central banks, and de-anchor inflation expectations. As
history repeatedly teaches us, this would only increase
the eventual cost of bringing inflation under control.
Over-tightening risks pushing the global economy into
an unnecessarily harsh recession. As several prominent
voices have argued recently, over-tightening is more
likely when central banks act in an uncoordinated
fashion. Financial markets may also struggle to cope
with an overly rapid pace of tightening. Yet, the costs
of these policy mistakes are not symmetric. Misjudging
yet again the stubborn persistence of inflation could

International Monetary Fund | October 2022

xiii

WORLD ECONOMIC OUTLOOK: COUNTERING THE COST?OF?LIVING CRISIS

prove much more detrimental to future macroeconomic
stability by gravely undermining the hard-won credibility of central banks. As economies start slowing down,
and financial fragilities emerge, calls for a pivot toward
looser monetary conditions will inevitably become
louder. Where necessary, financial policy should ensure
that markets remain stable, but central banks around
the world need to keep a steady hand with monetary
policy firmly focused on taming inflation.
These challenges do not imply that a large downturn is inevitable. In many countries, including the
United States, the United Kingdom, and the euro
area, labor markets remain tight, with historically
low unemployment rates and high levels of vacancies. Chapter 2 of this report documents how the
current environment—despite rapidly rising prices
and wages—may still avert a wage-price spiral, unless
inflation expectations become de-anchored.
Formulating the appropriate fiscal policy given
the juxtaposed Cost of Living, energy, and food crises
has become an acute challenge for many countries.
I shall mention a few important principles. First, for
countries where the pandemic is now firmly receding,
it is time to rebuild fiscal buffers. As the pandemic
vividly illustrated, fiscal space is essential for dealing
with crises. Countries with more fiscal room were
better able to protect households and businesses.
Second, fiscal policy should not work at crosspurposes with monetary authorities’ efforts to quell
inflation. Doing otherwise will only prolong the fight
to bring inflation down, risk de-anchoring inflation
expectations, increase funding costs, and stoke further
financial instability, complicating the task of fiscal as
well as monetary and financial authorities, as recent
events illustrated. Third, the energy crisis, especially
in Europe, is not a transitory shock. The geopolitical
re-alignment of energy supplies in the wake of Russia’s
war against Ukraine is broad and permanent. Winter
2022 will be challenging for Europe, but winter 2023
will likely be worse. Fiscal authorities in the region
need to plan and coordinate accordingly. Fourth,
price signals are essential to help curb demand and
stimulate supply. Price controls, untargeted subsidies,
or export bans are fiscally costly and lead to excess
demand, undersupply, misallocation, rationing, and
black-market premiums. History teaches us they rarely
work. Fiscal policy should instead aim to protect the
most vulnerable through targeted and temporary
transfers. If some aggregate fiscal support cannot be

xiv

International Monetary Fund | October 2022

avoided, especially in countries hardest hit by the
energy crisis, it is important to embed policy in a
credible medium-term fiscal framework. Fifth, fiscal
policy can help economies adapt to a more volatile
environment and bounce back from adversity by
investing in expanding productive capacity: human
capital, digitalization, green energy, and supply chain
diversification can make economies more resilient
when the next crisis comes. Unfortunately, these
simple principles are not uniformly guiding current
policy, and the risk of outsized, poorly targeted, and
broadly stimulative fiscal packages in many countries
is not negligible.
For many emerging markets, the strength of the
dollar is causing acute challenges, tightening financial
conditions, and increasing the cost of imported goods.
The dollar is now at its highest level since the early
2000s. So far, this appreciation appears mostly driven
by fundamental forces, such as the tightening of
monetary policy in the United States and the energy
crisis. The appropriate response in most countries is to
calibrate monetary policy to maintain price stability, while letting exchange rates adjust, conserving
valuable foreign exchange reserves for when financial
conditions really worsen.
As the global economy is headed for stormy waters,
financial turmoil may well erupt, prompting investors
to seek the protection of safe-haven investments, such
as US Treasuries, and pushing the dollar even higher.
Now is the time for emerging market policymakers
to batten down the hatches. Eligible countries with
sound policies should urgently consider improving
their liquidity buffers by requesting access to precautionary instruments from the Fund. Looking ahead,
countries should also aim to minimize the impact of
future financial turmoil through a combination of
preemptive macroprudential and capital flow measures, where appropriate, in line with our Integrated
Policy Framework. Too many low-income countries
are in or close to debt distress. Progress toward orderly
debt restructurings through the Group of Twenty’s
Common Framework for the most affected is urgently
needed to avert a wave of sovereign debt crisis. Time
may soon be running out.
Finally, the energy and food crises, coupled with
extreme summer temperatures, starkly remind us of
what an uncontrolled climate transition would look
like. Much action is needed to implement climate
policies that will ward off catastrophic climate change.

FOREWORD

As discussed in Chapter 3, these policies may have
some modest adverse implications for activity and
inflation in the near term that pale in comparison to
the catastrophic costs of doing nothing. Importantly,
these costs rise sharply the more we delay the green
transition. The message is clear: a timely and credible
transition, in addition to being critical for our planet’s
future, also helps macroeconomic stability.

Progress on climate policies, as well as on debt
resolution and other targeted multilateral issues, will
prove that a focused multilateralism can, indeed,
achieve progress for all and succeed in overcoming
geo-economic fragmentation pressures.
Pierre-Olivier Gourinchas
Economic Counsellor

International Monetary Fund | October 2022

xv

WORLD
WORLDECONOMIC
ECONOMIC
OUTLOOK:
OUTLOOK:
TENSIONS
COUNTERING
FROM THE TWO?SPEED
THE COST?OF?LIVING
RECOVERY CRISIS

EXECUTIVE SUMMARY

The global economy is experiencing a number of
turbulent challenges. Inflation higher than seen in
several decades, tightening financial conditions in
most regions, Russia’s invasion of Ukraine, and the
lingering COVID-19 pandemic all weigh heavily on
the outlook. Normalization of monetary and fiscal
policies that delivered unprecedented support during
the pandemic is cooling demand as policymakers aim
to lower inflation back to target. But a growing share
of economies are in a growth slowdown or outright
contraction. The global economy’s future health rests
critically on the successful calibration of monetary
policy, the course of the war in Ukraine, and the
possibility of further pandemic-related supply-side
disruptions, for example, in China.
Global growth is forecast to slow from 6.0 percent
in 2021 to 3.2 percent in 2022 and 2.7 percent in
2023. This is the weakest growth profile since 2001
except for the global financial crisis and the acute
phase of the COVID-19 pandemic and reflects
significant slowdowns for the largest economies: a
US GDP contraction in the first half of 2022, a euro
area contraction in the second half of 2022, and
prolonged COVID-19 outbreaks and lockdowns in
China with a growing property sector crisis. About
a third of the world economy faces two consecutive
quarters of negative growth. Global inflation is forecast to rise from 4.7 percent in 2021 to 8.8 percent
in 2022 but to decline to 6.5 percent in 2023 and to
4.1 percent by 2024. Upside inflation surprises have
been most widespread among advanced economies,
with greater variability in emerging market and
developing economies.
Risks to the outlook remain unusually large and to
the downside. Monetary policy could miscalculate the
right stance to reduce inflation. Policy paths in the
largest economies could continue to diverge, leading
to further US dollar appreciation and cross-border
tensions. More energy and food price shocks might
cause inflation to persist for longer. Global tightening in financing conditions could trigger widespread

xvi

International Monetary Fund | October 2022

emerging market debt distress. Halting gas supplies by
Russia could depress output in Europe. A resurgence
of COVID-19 or new global health scares might
further stunt growth. A worsening of China’s property
sector crisis could spill over to the domestic banking
sector and weigh heavily on the country’s growth,
with negative cross-border effects. And geopolitical fragmentation could impede trade and capital
flows, further hindering climate policy cooperation.
The balance of risks is tilted firmly to the downside,
with about a 25 percent chance of one-year-ahead
global growth falling below 2.0 percent—in the
10th percentile of global growth outturns since 1970.
Warding off these risks starts with monetary
policy staying the course to restore price stability. As
demonstrated in Chapter 2, front-loaded and aggressive monetary tightening is critical to avoid inflation
de-anchoring as a result of households and businesses
basing their wage and price expectations on their
recent inflation experience. Fiscal policy’s priority is
the protection of vulnerable groups through targeted
near-term support to alleviate the burden of the costof-living crisis felt across the globe. But its overall
stance should remain sufficiently tight to keep monetary policy on target. Addressing growing government
debt distress caused by lower growth and higher borrowing costs requires a meaningful improvement in
debt resolution frameworks. With tightening financial
conditions, macroprudential policies should remain
on guard against systemic risks. Intensifying structural reforms to improve productivity and economic
capacity would ease supply constraints and in doing
so support monetary policy in fighting inflation. Policies to fast-track the green energy transition will yield
long-term payoffs for energy security and the costs of
ongoing climate change. As Chapter 3 shows, phasing
in the right measures over the coming eight years will
keep the macroeconomic costs manageable. And last,
successful multilateral cooperation will prevent fragmentation that could reverse the gains in economic
well-being from 30 years of economic integration.

CHAPTER

1

GLOBAL PROSPECTS AND POLICIES

Inflation and Uncertainty
The world is in a volatile period: economic, geopolitical, and ecological changes all impact the
global outlook. Inflation has soared to multidecade
highs, prompting rapid monetary policy tightening and squeezing household budgets, just as
COVID-19-pandemic-related fiscal support is waning.
Many low-income countries are facing deep fiscal
difficulties. At the same time, Russia’s ongoing war in
Ukraine and tensions elsewhere have raised the possibility of significant geopolitical disruption. Although
the pandemic’s impact has moderated in most countries, its lingering waves continue to disrupt economic
activity, especially in China. And intense heat waves
and droughts across Europe and central and south Asia
have provided a taste of a more inhospitable future
blighted by global climate change.
Amid these volatile conditions, recent data releases
confirm that the global economy is in a broad-based
slowdown as downside risks—including risks highlighted in the July 2022 World Economic Outlook
(WEO) Update—materialize, although with some
conflicting signals. The second quarter of 2022
saw global real GDP modestly contract (growth of
–0.1 percentage point at a quarterly annualized rate),
with negative growth in China, Russia, and the US, as
well as sharp slowdowns in eastern European countries most directly affected by the war in Ukraine and
international sanctions aimed at pressuring Russia to
end hostilities. At the same time, some major economies did not contract—euro area growth surprised
on the upside in the second quarter, led by growth
in tourism-dependent southern European economies.
Forward-looking indicators, including new manufacturing orders and sentiment gauges, suggest a slowdown among major economies (Figure 1.1). In some
cases, however, signals conflict—with some indicators
showing output weakness amid labor market strength.
An important factor underpinning the slowdown
in the first half of this year is the rapid removal of
monetary accommodation as many central banks seek
to moderate persistently high inflation (Figure 1.2).
Higher interest rates and the associated rise in

borrowing costs, including mortgage rates, are having
their desired effect in taking the heat out of domestic
demand, with the housing market showing the earliest
and most evident signs of slowdown in such economies as the US. Monetary policy tightening has been
generally—although not everywhere—accompanied
by a scaling back of fiscal support, which had previously propped up households’ disposable incomes.
Broadly speaking, nominal policy rates are now above
pre-pandemic levels in both advanced and emerging
market and developing economies. With elevated inflation, real interest rates have generally not yet reverted
to pre-pandemic levels. Tightening financial conditions
in most regions, with the notable exception of China
(October 2022 Global Financial Stability Report),
reflected in a strong real appreciation of the US dollar
This has also driven up yield spreads—the difference
between countries’ US dollar– or euro-denominated
government bond yield and US or German government bond yields—for debt-distressed lower- and
middle-income economies (Figure 1.3). In sub-Saharan
Africa, yield spreads for more than two-thirds of sovereign bonds breached the 700 basis point level in August
2022––significantly more than a year ago. In eastern
and central Europe, the effects of the war in Ukraine
have exacerbated the shifting global risk appetite.
Beyond monetary policy alone, China’s COVID-19
outbreaks and mobility restrictions as part of the
authorities’ zero-COVID strategy and Russia’s invasion of
Ukraine have also pulled down economic activity. China’s
lockdowns have imposed sizable constraints domestically
and gummed up already strained global supply chains.
The war in Ukraine and deepening cuts to supplies
of gas to Europe have amplified preexisting stresses in
global commodity markets, driving natural gas prices
higher once more (Figure 1.4). European economies—
including the largest, Germany—are exposed to the
impact of the gas supply cuts. Continued uncertainty
over energy supplies has contributed to slower real economic activity in Europe, particularly in manufacturing,
dampening consumer and, to a lesser extent, business
confidence (Figure 1.1). However, a strong recovery
in the tourism-dependent southern economies helped

International Monetary Fund | October 2022

1

WORLD ECONOMIC OUTLOOK: COUNTERING THE COST?OF?LIVING CRISIS

Figure 1.1. Leading Indicators Show Signs of Slowdown
(Indices)

Figure 1.2. Change in Monetary Policy Cycle among G20
Economies
(Number of increases and cuts in policy rates)

United States
Brazil

Euro area
China

Japan
India

United Kingdom

15

65 1. Manufacturing PMIs

Tightening AEs
Tightening EMs

Easing AEs
Easing EMs

10

60

5

55

0
–5

50

–10

45
Jul.
2021

Oct.
21

Jan.
22

Apr.
22

Jul. Aug.
22 22

–15

2007

09

11

13

15

17

19

2 2. Consumer Sentiment
Sources: Bloomberg Finance L.P.; and IMF staff calculations.
Note: AEs = advanced economies; EMs = emerging market economies.

1
0
–1
–2
–3
Jul.
2021

Oct.
21

Jan.
22

Apr.
22

Jul. Aug.
22 22

Jan.
22

Apr.
22.

Jul. Aug.
22 22

3 3. Business Sentiment
2
1
0
–1
–2
–3
–4
Jul.
2021

Oct.
21

Sources: Haver Analytics; and IMF staff calculations.
Note: For panel 1, purchasing managers’ indices (PMIs) greater than 50 denote
expansion. In panels 2 and 3, values are normalized z-scores.

deliver better-than-anticipated overall growth in the first
half of 2022.
Food prices—a prime driver of global inflation so
far this year—have provided a rare slice of good news,
with futures prices falling (Figure 1.4) and the Black
Sea grain deal giving some hope of improved supply in
coming months. More generally, some signs show that
commodity prices might be starting to ease off as global
2

International Monetary Fund | October 2022

demand slows, helping to moderate inflation. However, recent extreme heat waves and droughts are a stark
reminder of the near-term threat from climate change and
its likely impact on agricultural productivity (Figure 1.5).
Although a slight rebound is forecast for the second
half of the year, full-year growth in 2022 will likely fall
far short of average pre-pandemic performance and the
strong growth rebound in 2021. In 2022, the world
economy is predicted to be 3.2 percent larger than in
2021, with advanced economies growing 2.4 percent
and emerging market and developing economies growing 3.7 percent. The world economy will expand even
more slowly in 2023, at 2.7 percent, with advanced
economies growing 1.1 percent and emerging market
and developing economies 3.7 percent.
Three key factors critically shape this economic
outlook: monetary policy’s stance in response to elevated inflation, the impact of the war in Ukraine, and
the ongoing impact of pandemic-related lockdowns
and supply chain disruptions. The following sections
discuss each of these forces in turn before presenting
the outlook in detail.

Central Banks Tackle Stubbornly High Inflation
Since 2021, inflation has risen faster and more persistently than expected. In 2022, inflation in advanced
economies reached its highest rate since 1982. Although
inflation is a broad phenomenon, affecting most economies across the world (Figure 1.6), it has the most

21 Aug.
22

CHAPTER 1

Figure 1.3. EMDE Sovereign Spreads

GLOBAL PROSPECTS AND POLICIES

Figure 1.4. Wholesale Food and Fuel Prices Expected to
Moderate

(Basis points)

(Index, January 2019 = 100)
2,500

August 2021

800

August 2022
2,000

600
1,500
400

1,000

500

0

Natural gas index
Brent crude oil
Wheat
Natural gas index—July 2022 WEO Update
Brent crude oil—July 2022 WEO Update
Wheat—July 2022 WEO Update

200

EMDE Asia

EMDE Europe

LAC

ME&CA

SSA

0
2019:Q1

Sources: Bloomberg Finance L.P.; and IMF staff calculations.
Note: For each region, box denotes upper quartile, median, and lower quartile of
the members, and whiskers show maximum and minimum values within the
boundary of 1.5 times interquartile range from upper and lower quartiles. Y-axis is
cut off at 2,500 basis points. EMDE = emerging market and developing economy;
LAC = Latin America and the Caribbean; ME&CA = Middle East and Central Asia;
SSA = sub-Saharan Africa.

20:Q1

21:Q1

22:Q1

23:Q1

23:Q4

Source: IMF staff calculations.
Note: Natural gas index comprises European, Japanese, and US natural gas price
indices. WEO = World Economic Outlook.

(Annualized percent)

April 2022

Figure 1.6. Core In?ation and Its Distribution across Countries

(Degrees Celsius; departures from 1960–91 normal)
Israel
Armenia
Kuwait
Turkmenistan
Saudi Arabia
Kyrgyz Republic
Pakistan
Kazakhstan
Jordan
Uzbekistan

May 2022

Figure 1.5. Mean Land Temperature

Ethiopia
Tunisia
Austria
Croatia
BIH
Portugal
Slovenia
Spain
Morocco
France

15
12

Mean
Median
25th–75th percentile

9
6
Middle East and
Central Asia
Sub-Saharan Africa
Europe

0

1

2

3

4

5

Sources: Osborn and others (2021); and IMF staff calculations.
Note: Figure shows deviation from 1960 to 1991 normal monthly temperatures
and hottest 10 countries by month. BIH = Bosnia and Herzegovina.

6

3
0
–3
2000

03

06

09

12

15

18

21 Jul.
22

Sources: Haver Analytics; and IMF staff calculations.
Note: The set of economies includes ARG, BRA, CAN, CHE, CHL, CHN, COL, CZE,
DEU, DNK, ESP, FRA, GBR, HKG, HUN, IDN, IND, ISR, ITA, JPN, KOR, MEX, MYS,
NOR, PER, PHL, POL, RUS, SGP, SWE, THA, TUR, TWN, USA, and ZAF. The group
represents 89.4 percent of advanced economy GDP, 75 percent of emerging
market and developing economy GDP, and 81 percent of world GDP based on
purchasing-power-parity weights. Economy list uses International Organization for
Standardization (ISO) country codes.

International Monetary Fund | October 2022

3

WORLD ECONOMIC OUTLOOK: COUNTERING THE COST?OF?LIVING CRISIS

Figure 1.8. Rebalancing of Demand: Goods versus Services

(Percent, 2022)

(Percent deviation from pre–COVID-19 averages)

Wheat stores as a share of annual consumption

Figure 1.7. In?ation Hits the Poorest Hardest
120

Advanced economies
Emerging market and middle-income economies
Low-income developing countries

100

10
8

80

6

60

4

40

2

20

0

0
0

20

40
60
80
100
120
Import share of wheat consumption

140

160

Sources: Food and Agriculture Organization of the United Nations; US Department
of Agriculture, Foreign Agricultural Service; and IMF staff calculations.
Note: Data re?ect storage-level estimates at the end of the ?rst quarter of 2022
and projected consumption levels for 2022. Import share can exceed 100 because
of stock building and reexport. Triangles show country group averages.

severe impact on lower-income groups in developing
economies. In these countries, up to half of household
consumption expenditure is on food, meaning that
inflation can have particularly acute impacts on human
health and living standards (Figure 1.7). Despite a
slight decline in the consumer price index in July and
August, US inflation reached one of its highest levels
in about 40 years, with prices in August 8.3 percent
higher than those one year earlier. Euro area saw inflation reach 10 percent in September, while the UK saw
annual inflation of 9.9 percent. Emerging market and
developing economies are estimated to have seen inflation of 10.1 percent in the second quarter of 2022 and
face a peak inflation rate of 11.0 percent in the third
quarter: the highest rate since 1999. The reverberations
of last year’s strong demand recovery and a continued
rebalancing of demand toward services such as travel
(Figure 1.8) have driven up inflation. Although futures
prices have fallen, the delayed pass-through of past
increases in food and energy prices from global commodity markets to consumer prices may continue to
drive inflation yet higher in the short term. In Europe,
a significant impact from war-related energy shocks
compounds these effects, whereas in Asia, a more moderate impact on food prices is helping to keep inflation
from rising as much as elsewhere (Figure 1.9).
An important recent development is that although
volatile headline shocks to items such as energy and
4

International Monetary Fund | October 2022

–2
Jan.
2019

Core goods: Advanced economies
Core goods: Emerging markets
Services: Advanced economies
Services: Emerging markets

July
19

Jan.
20

July
20

Jan.
21

July
21

Jan.
22

Aug.
22

Sources: Haver Analytics; and IMF staff calculations.
Note: Lines show the difference between the year-over-year percent change in
price indices each month and the average observed during 2018 and 2019 for
each sector. Core goods exclude energy and food. Countries are aggregated using
purchasing-power-parity weights. Advanced economies comprise Australia,
Canada, the euro area, Japan, Korea, and the United States. Emerging markets
comprise Brazil, Chile, Colombia, Indonesia, Malaysia, Mexico, Russia, and South
Africa.

food prices still account for much of inflation, they
are no longer the overwhelmingly dominant drivers.
Instead, underlying inflation has also increased—as
measured by different gauges of core inflation—and
is likely to remain elevated well into the second half
Figure 1. . In?ation Dri en b Food and Fue
(Annualized percent)
16
14
12

Food
Energy, transport, and housing
Other
Consumer price index, all items

10
8
6
4
2
0
–2
20 21 22
2020 21 22
Sub-Saharan Asia and Paci?c
Africa

20 21 22
Europe

20 21 22
20 21 22
Middle East
Western
and Central Asia Hemisphere

Sources: IMF, Consumer Price Index database; and IMF staff calculations.
Note: Figure shows in?ation contributions from broad categories. Contributions are
computed ?rst by country, annualized over available months in cases in which data
are partial (for example, for 2022). The ?gure shows both the median contributions
and aggregate in?ation rate for each region.

CHAPTER 1

of 2022. Global core inflation, measured by excluding
food and energy prices, is expected to be 6.6 percent
on a fourth-quarter-over-fourth-quarter basis, reflecting
the pass-through of energy prices, supply chain cost
pressure, and tight labor markets, especially in advanced
economies. In contrast, the cooling of economic activity
in China has also eased core inflation. On average, nominal wages take time to increase in response to inflation,
leading real wages to decline and acting as a dampener
on demand (see Chapter 2). Yet despite some pockets of
uncertainty, long-term inflation expectations have generally remained stable in most major economies.
High inflation in 2021 and 2022 has surprised many
macroeconomic forecasters, including IMF staff. Upside
inflation surprises have occurred for most economies
but have been especially widespread among advanced
economies. The simple question is, Why? While
our understanding is still evolving, forecasters likely
underestimated the impact of the strong economic
recovery in 2021—supported by fiscal intervention
in advanced economies—coinciding with strained
supply chains and tight labor markets (Box 1.1). Across
advanced economies, forecast errors are related to the
size of COVID-19–related fiscal stimulus packages.
The correlation of output and inflation forecast errors
is positive in both 2021 and 2022, but the relationship
was stronger in 2021 than it has been so far in 2022.
That errors were in the same direction suggests that
excess demand has been a dominant factor, particularly in 2021, as some large economies may have been
at the steeper end of the aggregate supply curve. The
declining cross-country correlation in 2022 hints at
an increased role for supply shocks, related to clogged
supply chains and, more recently, the war in Ukraine.
Headline inflation forecast errors have been larger for
eastern European economies in 2022, consistent with
the war in Ukraine driving up headline inflation. More
generally, forecast errors for the noncore part of inflation (mainly reflecting food and energy prices), which
can reflect supply shocks, have contributed more to
unexpected increases in inflation in 2022 than in 2021.
Core inflation forecast errors in China and developing
Asia have been negative and relatively small so far this
year, consistent with the slowdown in real activity.
Public debate has also included discussion of the
role of business markups—the price-to-marginal-cost
ratio—during the pandemic as a potential driver of
inflation. Markups have risen steadily over several years,
prompting intense debate. Yet their recent dynamics
do not suggest that markups are contributing in any

GLOBAL PROSPECTS AND POLICIES

sizable way to the current inflationary environment
(Box 1.2). Elevated markups in fact make persistent
wage-price spirals less likely, since they provide flexible
buffers between general wage and general price increases
(see Chapter 2 and in particular, Box 2.1). And despite
historically tight labor markets in advanced economies,
incipient wage-price spirals are not yet on the horizon.
The rise in US inflation has attracted especially
intense attention, as it came earlier than in other
advanced economies and surprised many economists.
One factor explaining the surprise was unexpected
adverse shocks from the disruption of supply chains
and the rise in energy prices. The effects of those
shocks appear to have passed through to underlying
inflation. Another reason that economists’ expectations
missed the high-inflation episode was that economists typically measured labor market tightness using
the unemployment rate, which has historically had a
relatively flat relationship with inflation and did not
decline below pre-pandemic levels. Meanwhile, other
measures of labor market tightness, including the ratio
of vacancies to unemployed workers and the intensity
of on-the-job search, unexpectedly rose to historic
highs and better explain the rise in inflation (Ball,
Leigh, and Mishra, forthcoming).
To prevent inflation from becoming entrenched, central banks have rapidly lifted nominal policy rates. The
Federal Reserve has increased the federal funds target
rate by 3 percentage points since early 2022 and has
communicated that further rises are likely. The Bank
of England has raised its policy rate by 2 percentage
points since the start of the year despite projecting weak
growth. The European Central Bank has raised its policy rate by 1.25 percentage points this year. But because
inflation has outstripped these increases, with a few
exceptions, real policy rates remain below pre-pandemic
levels (Figure 1.10). Differences in the paths of monetary policy normalization are due in part to core inflation rising rapidly in some advanced economies, most
notably in the US, before it did in others. Real activity
and financial markets have responded to the removal
of monetary accommodation, with tentative signs of
cooling housing markets, especially in the US, and of
slowing momentum in labor markets. Interest rates and
spreads have also risen in many countries and across the
yield curve, inducing volatility in financial markets.
The Federal Reserve has raised interest rates more
aggressively than the European Central Bank in part
because of differences in underlying inflation dynamics
and economic conditions to date. Core inflation rose
International Monetary Fund | October 2022

5

WORLD ECONOMIC OUTLOOK: COUNTERING THE COST?OF?LIVING CRISIS

Figure 1.10. Real Short-Term Rates Are Rising

Figure 1.11. A Transatlantic Divergence

(Percent)

(Percent, unless noted otherwise)
United States

2 1. Advanced Economies
7 1. Core In?ation

0

Euro area
2. Unemployment Rate

6
–2

10
8

5
United States
Euro area
Japan
United Kingdom
Canada

–4
–6
–8
2019:Q1

20:Q1

4

6

3

4

2
21:Q1

22:Q1

22:Q4

0
2021:
Q1

10 2. Emerging Market and Developing Economies
5

2

1
22:Q1

23:Q1

23:
Q4

2.5 3. Vacancies to
Unemployment
(Ratio)
2.0

0

–10

22:Q1

23:Q1

4. Output Gap

0
23:
Q4
1.0
0.5
0.0

Brazil
China
Russia
South Africa

–5

2021:
Q1

1.5

–0.5

1.0

–1.0
–1.5

–15
2019:Q1

20:Q1

21:Q1

22:Q1

22:Q4

Source: IMF staff calculations.
Note: Projection for the euro area is estimated using projections for 16 individual
euro area countries. Real rate computed as short-term nominal interest rate less
core in?ation one ear ahead

sooner and has run higher in the US than in the euro
area, with tighter labor markets and a higher estimated
output gap (Figure 1.11). These differences partly reflect
transatlantic differences in the level of direct fiscal
stimulus earlier in the pandemic, as well as differences
in the impacts of commodity price shocks and changes
in private saving (see Figure 2.6). The gap between real
and nominal wage growth has also closed more rapidly
in the US than in the euro area, which has added further
to underlying US inflation momentum. But inflationary pressures are building in the euro area: the war in
Ukraine continues to have a very clear impact, with
energy and food prices accounting for about two-thirds
of the rise in headline inflation and energy price increases
passing through into broader inflation measures.

War in Ukraine Causes More Human Suffering
and Economic Damage
Russia’s war in Ukraine continues to leave a mark on
the region and internationally. The war has displaced
millions of people and led to substantial loss of human
6

International Monetary Fund | October 2022

0.5
0.0
2020:
Q4

–2.0
21:
Q2

21:
Q4

22:
Q2

2021

22

–2.5
23

Sources: Haver Analytics; and IMF staff calculations.
Note: Vacancies to unemployment is de?ned as the ratio of the number of
vacancies to the number of unemployed people. For the latter, the age group is
15–64 in the euro area and 16 or older in the United States. Job vacancy data may
comprise all sectors or only industry-construction-services depending on data
availability at the country level. The euro area vacancy-to-unemployment ratio is
computed by summing the country-level data on number of vacancies and
unemployed and then computing the ratio.

life and damage to physical capital in Ukraine. In
addition to financial and technological sanctions aimed
at pressuring Russia to end hostilities, the European
Union implemented embargoes on imports of coal in
August 2022. It also announced a ban on imports of
seaborne oil starting at the end of 2022 and a maritime
insurance ban. Reduced exports from Russia, most
notably of gas, have also affected fossil fuel trade, with
the flow of Russian pipeline gas to Europe down to
about 20 percent of its level one year ago (Figure 1.12).
This has contributed to the steep increase in natural gas
prices. The war is having severe economic repercussions
in Europe, with higher energy prices, weaker consumer
confidence, and slower momentum in manufacturing
resulting from persistent supply chain disruptions and
rising input costs. Adjoining economies––Baltic and

CHAPTER 1

GLOBAL PROSPECTS AND POLICIES

Figure 1.12. Russian Pipeline Gas Supplies to EU by Route

Figure 1.13. New Con rmed COVID-19 Deaths

(Million cubic meters a day)

(Persons; seven-day moving average)
Baltics and Finland
Belarus
Nord Stream 1

500

TurkStream
Ukraine
Total

17,500
15,000

400

12,500
300

Russia, Türkiye, South Africa
Rest of the world

United States
Euro area
Other AEs
India
EMDE Asia ex. IND
LAC

10,000
7,500

200

5,000
100

2,500
0
Jan. Mar.
2021 21

May
21

July
21

Sep.
21

Nov.
21

Jan.
22

Mar.
22

May
22

July
22

Sep.
22

Sources: European Network of Transmission System Operators for Gas; Gas
Transmission System Operator of Ukraine; and IMF staff calculations.
Note: Latest data available are for September 18, 2022. Recent data are
provisional. Gas ?ow volumes are measured at EU border crossing points; Belarus
excludes ?ows to Kaliningrad (Russia). EU = European Union.

eastern European states––have felt the largest impact,
with their growth slowing sharply in the second and
third quarters and their inflation rates soaring.
Russia’s economy is estimated to have contracted by
21.8 percent (at a quarterly annualized rate) during
the second quarter, although crude oil and nonenergy
exports held up. Russian domestic demand is showing
some stability, thanks to containment of the effect
of sanctions on the domestic financial sector policy
support, and a resilient labor market.
The war in Ukraine is also having global consequences for food prices. Despite the recent agreement on Black Sea grain exports, global food prices
remain elevated, although they are expected to soften
somewhat. This chapter’s Special Feature, “Market
Developments and Food Price Inflation Drivers,”
points to supply-side factors dominating current food
price dynamics, compounded by the export restrictions several countries have implemented. Overall,
international inflation has moved higher, propelled
by further increases in consumer energy and food
prices, as the war has led to a broadening of inflationary pressures. Countries with diets tilted toward
foods with the largest price gains, especially wheat
and corn; those more dependent on food imports;
and those with diets including sizable quantities of
foods with large pass-throughs from global to local
prices have suffered most. Low-income countries

0

Mar.
2020

Sep.
20

Mar.
21

Sep.
21

Mar.
22

Sep.
22

Sources: Our World in Data; and IMF staff calculations.
Note: Data as of e tem er
2022 conom grou and regional classi?cations
are those in the World Economic Outlook. “Other AEs” by International Organization
for Standardization (ISO) country codes are AUS, CAN, CHE, CZE, DNK, GBR, HKG,
ISL, ISR, JPN, KOR, MAC, NOR, NZL, SGP, SMR, SWE, and TWN. AEs = advanced
economies; EMDE Asia ex. IND = emerging market and developing economies in
Asia excluding India; LAC = Latin American and Caribbean economies.

whose citizens were already experiencing acute malnutrition and excess mortality before the war have
suffered a particularly severe impact, with especially
serious effects in sub-Saharan Africa, as food accounts
for about 40 percent of that region’s consumption
basket, on average, and the pass-through from
global to domestic food prices is relatively high at
30 percent (April 2022 Regional Economic Outlook:
Sub-Saharan Africa).

COVID-19 Continues to Hold Back
Economic Progress
As inflation, monetary and fiscal tightening, and
the war in Ukraine continue to squeeze global activity, the pandemic (Figure 1.13) is also weighing on
the macroeconomic outlook. Pandemic-related forces
have been particularly important in China, where
a second-quarter contraction contributed to slower
global activity. Temporary lockdowns in Shanghai
and elsewhere due to COVID-19 outbreaks have
weakened local demand, which is reflected in the
new-orders component of the purchasing managers’
index (Figure 1.1). Other data corroborate this picture
of slowing economic activity in China. Manufacturing
capacity utilization in the country, for example,
slowed to less than 76 percent in the second quarter:
International Monetary Fund | October 2022

7

WORLD ECONOMIC OUTLOOK: COUNTERING THE COST?OF?LIVING CRISIS

its lowest level in five years, except during the acute
phase of the pandemic. Such disruptions in China not
only have a domestic effect but also spill over internationally, as lower demand implies fewer exports for
foreign suppliers. And capacity constraints in production and logistics delay the unclogging of supply
chains, keeping global supply pressures—and hence
inflation—elevated.
Resurgent variants of the COVID-19 virus threaten
economic recovery elsewhere too. Limited vaccinations
make sub-Saharan Africa more prone to ongoing illness and increase the risk of exposures to new variants.
African vaccination rates are still a fraction of those of
all other regions, at about 26 percent, compared with
about 66 percent in other regions. Booster shots have
been administered to a mere 2 percent of people in
African countries, on average—orders of magnitude
lower than the rate on other continents, where booster
shots cover between a third and half of their populations. This low vaccination rate has partly contributed
to sub-Saharan Africa’s real per capita GDP growth
lagging behind that of advanced economies in 2022.
Pandemic-induced scarring has also slowed human
capital buildup as a result of learning losses from
lack of schooling and on-the-job skill acquisition (see
Barrett and others 2021).

The Forecast: Output Lower Still, but
Inflation Peaking
The developments described in the preceding
section, with downside risks materializing, mean that
projected global growth is declining and, in 2023,
now falls between the July WEO Update baseline and
alternative scenarios. Uncertainties continue to cloud
forecasts of global growth and inflation. The baseline
forecasts described in the following discussion are predicated on several assumptions that plausibly may fail
to hold: that no further sharp reductions in flows of
natural gas from Russia to the rest of Europe occur in
2022, beyond the current 80 percent reduction compared with a year ago; that long-term inflation expectations remain stable; and that disinflationary monetary
policy tightening does not induce widespread recession
(a broad-based contraction in economic activity that
usually lasts more than a few months) and disorderly
adjustments in global financial markets.
To recognize the uncertainty surrounding the
global economy’s evolution, this World Economic
Outlook report presents a baseline forecast in this
8

International Monetary Fund | October 2022

section and—later on—a fan chart illustrating the
distribution of probabilities around the baseline as
well as a downside scenario (Box 1.3).

Global Growth: Near-Term Slowdown
A slowdown in global growth is forecast, from
6.0 percent in 2021 to 3.2 percent in 2022 and
2.7 percent in 2023 (Table 1.1). The global slowdown
in 2022 is as projected in the July 2022 WEO Update,
while the forecast for 2023 is lower than projected by
0.2 percentage point (Table 1.1). This prognosis for
the global economy is far below average: global economic growth averaged 3.6 percent during 2000–21
(and the same during 1970–2021). For most economies, the outlook is significantly weaker than projected
six months ago, in the April 2022 WEO. Forecasts are
weaker than expected for 143 economies (accounting
for 92 percent of world GDP) for 2023. The forecast
for 2023 is the weakest since the 2.5 percent growth
rate seen during the global slowdown of 2001—with
the exception of those during the global financial and
COVID-19 crises.
The world’s three largest economies—China, the
euro area, and the US—will slow significantly in
2022 and 2023, with downgrades compared with
the predictions made in April and, in most cases,
July. The negative revisions reflect the materialization of downside risks highlighted in the April 2022
WEO and July 2022 WEO Update and discussed
at length in the previous section: tightening global
financial conditions in most regions, associated with
expectations of steeper interest rate hikes by major
central banks to fight inflation (October 2022 Global
Financial Stability Report); a sharper slowdown in
China due to extended lockdowns and the worsening property market crisis; and spillover effects from
the war in Ukraine with gas supplies from Russia to
Europe tightening.
A decline in global GDP or in global GDP per
capita—which often happens when there is a global
recession—is not currently in the baseline forecast.
However, a contraction in real GDP lasting for at
least two consecutive quarters (which some economists refer to as a “technical recession”) is seen at
some point during 2022–23 in about 43 percent of
economies with quarterly data forecasts (31 out of
72 economies), amounting to more than one-third of
world GDP (Figure 1.14). Moreover, projections for
global growth on a fourth-quarter-over-fourth-quarter

CHAPTER 1

GLOBAL PROSPECTS AND POLICIES

Table 1.1. Overview of the World Economic Outlook Projections
(Percent change, unless noted otherwise)

World Output

2021
6.0

Projections
2022
2023
3.2
2.7

Difference from July
2022 WEO Update1
2022
2023
0.0
–0.2

Difference from April
2022 WEO1
2022
2023
–0.4
–0.9

Advanced Economies
United States
Euro Area
Germany
France
Italy
Spain
Japan
United Kingdom2
Canada
Other Advanced Economies3

5.2
5.7
5.2
2.6
6.8
6.6
5.1
1.7
7.4
4.5
5.3

2.4
1.6
3.1
1.5
2.5
3.2
4.3
1.7
3.6
3.3
2.8

1.1
1.0
0.5
–0.3
0.7
–0.2
1.2
1.6
0.3
1.5
2.3

–0.1
–0.7
0.5
0.3
0.2
0.2
0.3
0.0
0.4
–0.1
–0.1

–0.3
0.0
–0.7
–1.1
–0.3
–0.9
–0.8
–0.1
–0.2
–0.3
–0.4

–0.9
–2.1
0.3
–0.6
–0.4
0.9
–0.5
–0.7
–0.1
–0.6
–0.3

–1.3
–1.3
–1.8
–3.0
–0.7
–1.9
–2.1
–0.7
–0.9
–1.3
–0.7

Emerging Market and Developing Economies
Emerging and Developing Asia
China
India4
ASEAN-55
Emerging and Developing Europe
Russia
Latin America and the Caribbean
Brazil
Mexico
Middle East and Central Asia
Saudi Arabia
Sub-Saharan Africa
Nigeria
South Africa

6.6
7.2
8.1
8.7
3.4
6.8
4.7
6.9
4.6
4.8
4.5
3.2
4.7
3.6
4.9

3.7
4.4
3.2
6.8
5.3
0.0
–3.4
3.5
2.8
2.1
5.0
7.6
3.6
3.2
2.1

3.7
4.9
4.4
6.1
4.9
0.6
–2.3
1.7
1.0
1.2
3.6
3.7
3.7
3.0
1.1

0.1
–0.2
–0.1
–0.6
0.0
1.4
2.6
0.5
1.1
–0.3
0.2
0.0
–0.2
–0.2
–0.2

–0.2
–0.1
–0.2
0.0
–0.2
–0.3
1.2
–0.3
–0.1
0.0
0.1
0.0
–0.3
–0.2
–0.3

–0.1
–1.0
–1.2
–1.4
0.0
2.9
5.1
1.0
2.0
0.1
0.4
0.0
–0.2
–0.2
0.2

–0.7
–0.7
–0.7
–0.8
–1.0
–0.7
0.0
–0.8
–0.4
–1.3
–0.1
0.1
–0.3
–0.1
–0.3

Memorandum
World Growth Based on Market Exchange Rates
European Union
Middle East and North Africa
Emerging Market and Middle-Income Economies
Low-Income Developing Countries

5.8
5.4
4.1
6.8
4.1

2.9
3.2
5.0
3.6
4.8

2.1
0.7
3.6
3.6
4.9

0.0
0.4
0.1
0.1
–0.2

–0.3
–0.9
0.2
–0.2
–0.3

–0.6
0.3
0.0
–0.2
0.2

–1.0
–1.8
0.0
–0.7
–0.5

10.1

4.3

2.5

0.2

–0.7

–0.7

–1.9

9.5
11.8

6.0
2.4

2.0
3.0

–0.2
1.3

–0.8
–0.3

–0.1
–1.5

–2.5
–1.8

8.7
11.8

4.2
3.3

2.5
2.9

–0.3
0.1

–1.0
–0.4

–0.8
–0.8

–2.2
–0.7

65.9

41.4

–12.9

–9.0

–0.6

–13.3

0.4

26.3

7.3

–6.2

–2.8

–2.7

–4.1

–3.7

4.7
3.1
5.9

8.8
7.2
9.9

6.5
4.4
8.1

0.5
0.6
0.4

0.8
1.1
0.8

1.4
1.5
1.2

1.7
1.9
1.6

World Trade Volume (goods and services)
Imports
Advanced Economies
Emerging Market and Developing Economies
Exports
Advanced Economies
Emerging Market and Developing Economies
Commodity Prices (US dollars)
Oil6
Nonfuel (average based on world commodity import
weights)
World Consumer Prices7
Advanced Economies8
Emerging Market and Developing Economies7

Source: IMF staff estimates.
Note: Real effective exchange rates are assumed to remain constant at the levels prevailing during July 22, 2022–August 19, 2022. Economies are listed on
the basis of economic size. The aggregated quarterly data are seasonally adjusted. WEO = World Economic Outlook.
1Difference based on rounded figures for the current, July 2022 WEO Update, and April 2022 WEO forecasts.
2See the country-specific note for the United Kingdom in the “Country Notes” section of the Statistical Appendix.
3Excludes the Group of Seven (Canada, France, Germany, Italy, Japan, United Kingdom, United States) and euro area countries.
4For India, data and forecasts are presented on a fiscal year basis, and GDP from 2011 onward is based on GDP at market prices with fiscal year 2011/12 as
a base year.

International Monetary Fund | October 2022

9

WORLD ECONOMIC OUTLOOK: COUNTERING THE COST?OF?LIVING CRISIS

Table 1.1. Overview of the World Economic Outlook Projections (continued)
(Percent change, unless noted otherwise)

World Output

2021
4.5

Projections
2022
2023
1.7
2.7

Q4 over Q49
Difference from July
2022 WEO Update1
2022
2023
0.0
–0.5

Difference from April
2022 WEO1
2022
2023
–0.8
–0.8

Advanced Economies
United States
Euro Area
Germany
France
Italy
Spain
Japan
United Kingdom2
Canada
Other Advanced Economies3

4.7
5.5
4.6
1.2
5.0
6.4
5.5
0.5
6.6
3.2
4.9

0.9
0.0
1.0
0.6
0.4
0.5
1.3
2.1
1.0
2.2
1.5

1.3
1.0
1.4
0.5
0.9
0.6
2.0
0.9
0.2
1.3
2.3

–0.4
–1.0
0.3
0.1
0.0
–0.1
0.0
–0.3
0.9
–0.3
–0.5

–0.2
0.4
–0.7
–1.0
–0.2
–1.0
–0.3
0.3
–1.1
–0.4
–0.5

–1.6
–2.8
–0.8
–1.8
–0.5
0.0
–1.0
–1.4
–0.1
–1.3
–1.0

–0.7
–0.7
–0.9
–2.0
–0.6
–1.6
–2.0
0.1
–1.3
–0.9
–0.5

Emerging Market and Developing Economies
Emerging and Developing Asia
China
India4
ASEAN-55
Emerging and Developing Europe
Russia
Latin America and the Caribbean
Brazil
Mexico
Middle East and Central Asia
Saudi Arabia
Sub-Saharan Africa
Nigeria
South Africa

4.3
3.8
3.5
3.9
4.7
6.4
4.8
4.0
1.6
1.2

6.7

2.4
1.8

2.5
4.0
4.3
3.3
3.8
–4.0
–7.6
2.1
2.9
2.4

4.5

2.1
2.1

3.9
4.2
2.6
6.8
6.0
4.5
1.0
2.2
0.7
1.2

3.7

2.3
1.0

0.4
0.0
0.2
–0.8
0.4
3.0
6.3
0.3
1.4
–0.5

–2.4

0.0
–0.1

–0.8
–0.5
–0.6
–0.4
–0.1
–3.2
–3.8
0.1
–0.8
0.2

0.0

0.0
–0.7

0.0
–0.4
–0.5
0.6
–1.3
2.0
6.5
0.5
2.1
–0.9

–2.4

0.0
–0.2

–1.0
–1.6
–2.1
–2.2
0.7
1.2
–2.3
–0.3
–1.2
–0.7

0.1

0.0
–0.1

Memorandum
World Growth Based on Market Exchange Rates
European Union
Middle East and North Africa
Emerging Market and Middle-Income Economies
Low-Income Developing Countries

4.5
5.0

4.3

1.5
0.9

2.4

2.1
2.0

3.9

–0.1
0.0

0.4

–0.4
–0.8

–0.8

–1.1
–0.9

0.0

–0.8
–0.7

–1.0

77.0

15.7

–8.3

–12.9

5.1

–12.9

3.3

16.7

–0.3

–0.3

–6.0

0.3

–9.7

2.2

5.6
4.9
6.2

9.3
7.5
10.9

4.7
3.1
6.1

1.0
1.2
0.9

0.6
0.8
0.4

2.4
2.7
2.1

0.8
0.9
0.8

Commodity Prices (US dollars)
Oil6
Nonfuel (average based on world commodity import
weights)
World Consumer Prices7
Advanced Economies8
Emerging Market and Developing Economies7
5Indonesia,

Malaysia, Philippines, Thailand, Vietnam.
average of prices of UK Brent, Dubai Fateh, and West Texas Intermediate crude oil. The average price of oil in US dollars a barrel was $69.42 in
2021; the assumed price, based on futures markets, is $98.19 in 2022 and $85.52 in 2023.
7Excludes Venezuela. See the country-specific note for Venezuela in the “Country Notes” section of the Statistical Appendix.
8The inflation rates for 2022 and 2023, respectively, are as follows: 8.3 percent and 5.7 percent for the euro area, 2.0 percent and 1.4 percent for Japan, and
8.1 percent and 3.5 percent for the United States.
9For world output, the quarterly estimates and projections account for approximately 90 percent of annual world output at purchasing-power-parity weights.
For Emerging Market and Developing Economies, the quarterly estimates and projections account for approximately 85 percent of annual emerging market
and developing economies’ output at purchasing-power-parity weights.
6Simple

basis are pointing to a significant weakening, to only
1.7 percent in 2022 and to 2.7 percent in 2023
(Table 1.1). Negative revisions are more pronounced
for advanced economies than those for emerging market and developing economies, for which
10

International Monetary Fund | October 2022

differing exposures to the underlying developments
imply a more mixed outlook (Figure 1.15). Overall,
the outlook is one of increasing growth divergence
between advanced and emerging market and developing economies.

CHAPTER 1

GLOBAL PROSPECTS AND POLICIES

Table 1.2. Overview of the World Economic Outlook Projections at Market Exchange Rate Weights
(Percent change)

2021
5.8

World Output

Projections
2022
2023
2.9
2.1

Difference from July
2022 WEO Update1
2022
2023
0.0
–0.3

Difference from April
2022 WEO1
2022
2023
–0.6
–1.0

Advanced Economies

5.2

2.3

1.1

–0.2

–0.3

–1.0

–1.2

Emerging Market and Developing Economies
Emerging and Developing Asia
Emerging and Developing Europe
Latin America and the Caribbean
Middle East and Central Asia
Sub-Saharan Africa

6.7
7.4
6.5
6.7
4.4
4.6

3.6
4.0
0.9
3.3
4.7
3.5

3.6
4.7
0.2
1.6
3.3
3.6

0.1
–0.1
1.4
0.5
0.0
–0.3

–0.1
–0.1
0.1
–0.3
0.1
–0.3

–0.2
–1.0
3.0
0.9
0.1
–0.3

–0.6
–0.7
–0.6
–0.8
–0.1
–0.3

Memorandum
European Union
Middle East and North Africa
Emerging Market and Middle-Income Economies
Low-Income Developing Countries

5.3
4.2
6.9
4.1

3.1
4.7
3.5
4.7

0.6
3.2
3.5
4.8

0.4
–0.1
0.1
–0.2

–0.9
0.1
–0.2
–0.3

0.3
–0.1
–0.2
0.1

–1.8
0.0
–0.7
–0.5

Source: IMF staff estimates.
Note: The aggregate growth rates are calculated as a weighted average, in which a moving average of nominal GDP in US dollars for the preceding three years
is used as the weight. WEO = World Economic Outlook.
1Difference based on rounded figures for the current, July 2022 WEO Update, and April 2022 WEO forecasts.

Figure 1.14. Countries in Contraction as a Share of Global
GDP, 2022–23

Figure 1.15. Global Growth and In?ation Forecasts
(Percent)

(Percent)
World
Advanced economies
Emerging market and developing economies

35
30

8 1. GDP Growth Rate

25

6

20

4

15
10

2

5
0

0
2021
January 2022
WEO Update

April 2022
WEO

July 2022
WEO Update

October 2022
WEO

Source: IMF staff calculations.
Note: “Contraction” is de?ned as consecutive negative quarter-over-quarter
growth in 2022 or 2023. The bars show the countries’ share in global GDP using
purchasing-power-parity-based GDP in 2022 as weights. WEO = World Economic
Outlook.

22

23

24

22

23

24

10 2. In?ation Rate
8
6
4
2
0
2021

Source: IMF staff calculations.
Note: Solid lines = October 2022 World Economic Outlook; dashed lines = April
2022 World Economic Outlook.

International Monetary Fund | October 2022

11

WORLD ECONOMIC OUTLOOK: COUNTERING THE COST?OF?LIVING CRISIS

Growth Forecast for Advanced Economies
For advanced economies, growth is projected to slow
from 5.2 percent in 2021 to 2.4 percent in 2022 and
1.1 percent in 2023. With the slowdown gathering
strength, growth is revised down compared with the
July WEO Update (by 0.1 percentage point for 2022
and 0.3 percentage point for 2023). The projected
slowdown and the downgrades are concentrated in the
US and European economies.
Growth in the United States is projected to decline
from 5.7 percent in 2021 to 1.6 percent in 2022 and
1.0 percent in 2023, with no growth in 2022 on a
fourth-quarter-over-fourth-quarter basis. Growth in
2022 has been revised down by 0.7 percentage point
since July, reflecting the unexpected real GDP contraction in the second quarter. Declining real disposable income continues to eat into consumer demand,
and higher interest rates are taking an important
toll on spending, especially spending on residential investment.
In the euro area, the growth slowdown is less pronounced than that in the United States in 2022 but
is expected to deepen in 2023. Projected growth is
3.1 percent in 2022 and 0.5 percent in 2023. There is
an upward revision of 0.5 percentage point since July
for 2022, on account of a stronger-than-projected
second-quarter outturn in most euro area economies,
and a downward revision of 0.7 percentage point for
2023. This average for the euro area hides significant
heterogeneity among individual member countries. In
Italy and Spain, a recovery in tourism-related services
and industrial production in the first half of 2022 has
contributed to projected growth of 3.2 percent and
4.3 percent, respectively, in 2022. However, growth
in both countries is set to slow sharply in 2023, with
Italy experiencing negative annual growth. Projected
growth in 2022 is lower in France, at 2.5 percent,
and in Germany, at 1.5 percent, and the slowdown in
2023 is especially sharp for Germany, with negative
annual growth. Weak 2023 growth across Europe
reflects spillover effects from the war in Ukraine, with
especially sharp downward revisions for economies
most exposed to the Russian gas supply cuts, and
tighter financial conditions, with the European Central
Bank having ended net asset purchases and rapidly
raising policy rates by 50 basis points in July 2022 and
75 basis points in September 2022. At the same time,
a number of factors have contributed to a less rapid
near-term slowdown than in the United States, including policy interest rates at still lower levels and, in a
12

International Monetary Fund | October 2022

number of European economies, NextGenerationEU
funds supporting economic activity.
In the United Kingdom too, a significant slowdown is
projected. Growth is forecast at 3.6 percent in 2022 and
0.3 percent in 2023 as high inflation reduces purchasing
power and tighter monetary policy takes a toll on consumer spending and business investment. This forecast
was prepared before the announcement (September 23)
of the sizable fiscal package and incorporates a less substantial fiscal expansion. The fiscal package is expected
to lift growth somewhat above the forecast in the near
term, while complicating the fight against inflation.
Growth in Japan is expected to be more stable at
1.7 percent in both 2021 and 2022 and 1.6 percent
2023, with a downward revision for 2023 since July
of 0.1 percentage point. The revisions reflect mainly
external factors, with a negative shift in the terms of
trade (ratio of export to import prices) from higher
energy import prices as well as lower consumption as
price inflation outpaces wage growth.

Growth Forecast for Emerging Market and
Developing Economies
Growth in the emerging market and developing
economy group is expected to decline to 3.7 percent
in 2022 and remain there in 2023, in contrast to the
deepening slowdown in advanced economies. The
forecast for 2022 is modestly upgraded from the July
forecast, reflecting a smaller-than-expected contraction
in emerging and developing Europe.
In emerging and developing Asia, growth is projected to
decline from 7.2 percent in 2021 to 4.4 percent in 2022
before rising to 4.9 percent in 2023, with a 0.2 percentage point and 0.1 percentage point downgrade since July
for 2022 and 2023, respectively. The revisions reflect the
downgrade for growth in China, to 3.2 percent in 2022
(the lowest growth in more than four decades, excluding the initial COVID-19 crisis in 2020). COVID-19
outbreaks and lockdowns in multiple localities, as well
as the worsening property market crisis, have held back
economic activity in China, although growth is expected
to rise to 4.4 percent in 2023. The outlook for India is
for growth of 6.8 percent in 2022––a 0.6 percentage
point downgrade since the July forecast, reflecting a
weaker-than-expected outturn in the second quarter and
more subdued external demand––and 6.1 percent in
2023, with no change since July. For the Association of
Southeast Asian Nations (ASEAN)-5 economies, projected growth in 2023 is revised down to reflect mainly

CHAPTER 1

less favorable external conditions, with slower growth
in major trading partners such as China, the euro area,
and the US; the decline in household purchasing power
from higher food and energy prices; and in most cases,
more rapid monetary policy tightening to bring inflation
back to target.
In emerging and developing Europe, growth is projected at 0.0 percent in 2022 and 0.6 percent in 2023,
with a 1.4 percentage point upgrade for 2022 and a
0.3 percentage point downgrade for 2023, compared
with the July forecast. The economic weakness reflects
–3.4 percent and –2.3 percent projected growth in
Russia in 2022 and 2023 and a forecast contraction
of 35.0 percent in Ukraine in 2022, as a result of the
war in Ukraine and international sanctions aimed at
pressuring Russia to end hostilities. The contraction
in Russia’s economy is less severe than earlier projected, reflecting resilience in crude oil exports and
in domestic demand with greater fiscal and monetary
policy support and a restoration of confidence in the
financial system.
Growth in Latin America and the Caribbean is
forecast at 3.5 percent in 2022 and 1.7 percent
in 2023. Growth for 2022 is higher by 0.5 percentage point than projected in July, reflecting
stronger-than-expected activity in the first half of
2022 on the back of favorable commodity prices,
still-favorable external financing conditions, and the
normalization of activities in contact-intensive sectors.
However, growth in the region is expected to slow
in late 2022 and 2023 as partner country growth
weakens, financial conditions tighten, and commodity
prices soften.
Growth in the Middle East and Central Asia is
projected to increase to 5.0 percent in 2022, largely
reflecting a favorable outlook for the region’s oil
exporters and an unexpectedly mild impact of the war
in Ukraine on the Caucasus and Central Asia. In 2023
growth in the region is set to moderate to 3.6 percent
as oil prices decline and the headwinds from the global
slowdown and the war in Ukraine take hold.
In sub-Saharan Africa, the growth outlook is
slightly weaker than predicted in July, with a
decline from 4.7 percent in 2021 to 3.6 percent
and 3.7 percent in 2022 and 2023, respectively—
downward revisions of 0.2 percentage point and
0.3 percentage point, respectively. This weaker outlook reflects lower trading partner growth, tighter
financial and monetary conditions, and a negative
shift in the commodity terms of trade.

GLOBAL PROSPECTS AND POLICIES

Figure 1.16. The Shocks of 2022: Persistent Output Losses
(Percentage point deviation from preshock growth forecast)
1

United States
China
Other EMDEs

Euro area
India
Total

Other AEs
Russia

0

–1

–2

–3

–4

2022

2026

Source: IMF staff estimates.
Note: Figure reports deviations of cumulative growths since 2021 from forecasts in
the January 2022 World Economic Outlook Update. AEs = advanced economies;
EMDEs = emerging market and developing economies.

Medium-Term Scarring
The adverse shocks of 2022 are expected to have
long-lasting effects on output. The fall in global real
GDP in 2022 compared with forecasts made at the
start of 2022 (published in the January WEO Update)
amounts to 1.3 percent (Figure 1.16). Although windfall gains and gains from reform may protect some
countries (for example, Gulf Cooperation Council
members), by 2026, the output loss (cumulative
growth) compared with those early 2022 forecasts is
projected at 3.0 percent: more than double the initial
impact. About half of the projected 2022 decline is
due to lower growth in China, the euro area, Russia,
and the US, with this composition holding fairly
steady over the forecast horizon. Long-lasting and
widening output losses across economies from the
shocks of 2022 reflect several factors, including the
combination of the supply-side nature of the initial
shocks and macroeconomic policy tightening. For
economies directly affected by the war in Ukraine,
the damage to activity is likely to last long and affect
most industries (Novta and Pugacheva 2021, 2022).
The fading of COVID-19 fiscal support packages
and anti-inflation monetary policy tightening contrast with the expansive policy support put in place
in many economies in 2020. The persistent effects
are consistent with economic slowdowns resulting
in less investment in capital, training, and research
International Monetary Fund | October 2022

13

WORLD ECONOMIC OUTLOOK: COUNTERING THE COST?OF?LIVING CRISIS

Figure 1.17. Scarring from the Pandemic
(Percent deviation from pre-pandemic trend)
6 1. Output Losses Relative to Pre-pandemic Trend, 2024
4
January 2022 World Economic Outlook Update
2
0
–2
–4
–6
–8
–10
–12
EMDEs Asia
EMDEs
LAC
SSA
ME&CA
ex. CHN
Europe
EMDEs
China
World
US
AEs ex. US
1 2. Employment Losses Relative to Pre-pandemic Trend, 2024
January 2022 World Economic Outlook Update
0

Inflation Peaking

–1
–2
–3
–4

losses disproportionately. Advanced economies had on
average no projected economic losses, reflecting their
ability to implement exceptionally large policy support
packages. For the US as of January 2022, real GDP in
2024 was expected to surpass pre-pandemic forecasts
by 1.8 percent. In contrast, in emerging market and
developing economies, with a younger population,
greater pandemic disruption to schooling, less policy
space, and greater preexisting investment needs, output
and employment were expected to remain somewhere
below previous trends for years to come (with average
losses of 4.3 percent for output and 2.6 percent for
employment in 2024). The shocks of 2022 have nearly
doubled the projected global output loss for 2024, to
4.6 percent.

World

EMDEs

AEs ex. US

US

Source: IMF staff calculations.
Note: The ?gure shows medium-term losses, which are the differences between
forecasts of the indicated variable (for 2024) relative to the January 2020 WEO
Update. The sample of countries in panel 2 comprises those that have
comparable employment projections for both times depicted. The emerging
market and developing economy (EMDE) employment aggregate excludes China
and India owing to changes in employment de?nitions across vintages. AEs ex.
US = advanced economies excluding the United States; EMDEs Asia ex.
CHN = EMDEs in Asia excluding China; LAC = Latin American and Caribbean
economies; ME&CA = Middle Eastern and Central Asian economies; SSA = subSaharan African economies.

and development, implying scarring to economic
potential.1
The shocks of 2022 are exacerbating the ongoing
economic scarring from the pandemic (Figure 1.17),
particularly for emerging market and developing
economies. At the start of 2022, the pandemic’s
medium-term impact on global GDP was already projected at about –2.4 percent by 2024 (the difference
between the January 2022 WEO Update projection
and the January 2020 projection, which preceded the
pandemic’s onset). Emerging market and developing
economies bore the projected output and employment
1For a discussion of such hysteresis effects on the supply side
of the economy, see, for example, Yellen (2016); Ball (2009,
2014); Blanchard, Cerutti, and Summers (2015); and Adler and
others (2017).

14

International Monetary Fund | October 2022

The forecast for global headline consumer price
index inflation is for a rise from 4.7 percent in
2021 to 8.8 percent in 2022—an upward revision
of 0.5 percentage point since July—and a decline
to 6.5 percent in 2023 and 4.1 percent in 2024.
Forecasts for most economies have been revised up
modestly since July but are significantly above forecasts made earlier in 2022. On a four-quarter basis,
projected global headline inflation peaks at 9.5 percent in the third quarter of 2022 before declining
to 4.7 percent by the fourth quarter of 2023. The
disinflation projected for 2023 occurs in almost all
economies for which forecasts are available but is most
pronounced in advanced economies (Figure 1.18). The
faster disinflation for advanced economies—a sharper
reduction in 2023 for a given level of inflation in
2022—is consistent with the notion that these economies benefit more than emerging markets from greater
credibility of monetary frameworks and that this helps
to reduce inflation.
The upward inflation revision is especially large
for advanced economies, in which inflation is expected
to rise from 3.1 percent in 2021 to 7.2 percent in
2022 before declining to 4.4 percent by 2023 (up
by 0.6 percentage point and 1.1 percentage point in
2022 and 2023, respectively, compared with the July
forecast). Significant increases in headline inflation
among such major economies as the US (a 0.4 percentage point upward revision to 8.1 percent) and the
euro area (a 1.0 percentage point upward revision to
8.3 percent) are driving the increase for the group.
Forecasts for 2024 are relatively unchanged––up by

CHAPTER 1

Global Trade Slowdown, with Wider Balances

Figure 1.18. In?ation Likely to Decline Next Year
(Percent)

2023 in?ation forecast

20

Advanced economies
Emerging market and middle-income economies
Low-income developing countries

15

10

5

0
0

5

10
2022 in?ation forecast

15

GLOBAL PROSPECTS AND POLICIES

20

Source: IMF staff calculations.
Note: Figure reports 45-degree line (solid) and lines (dashes) of best ?t for each
group of economies with matching colors. 16 countries with 2022 in?ation higher
than 20 percent are not shown. 14 of those countries show 2023 in?ation at the
same or lower levels than that in 2022.

only 0.1 percentage point––reflecting confidence that
inflation will decline as central banks tighten policies and energy prices decline. At the same time, the
projected inflation reduction is, as mentioned, proportionately greater for advanced economies than for other
country groups.
For emerging market and developing economies,
inflation is expected to rise from 5.9 percent in 2021
to 9.9 percent in 2022, before declining to 8.1 percent in 2023. Prices in the fourth quarter of 2023
are projected at 6.1 percent higher than in the same
quarter of 2022. Revisions for these economies (with
annual inflation revised up by 0.4 percentage point
and 0.8 percentage point in 2022 and 2023, respectively, compared with the July forecast) display greater
variation across economies than those for advanced
economies. There is on average a relatively modest
upward revision to the inflation forecast for emerging
and developing Asia (partly because of a slowdown
of activity in China and limited increases in prices of
foods that make up a large part of diets) and a modest
downward revision for Middle East and Central Asia
economies. There are larger revisions to the inflation
forecasts for Latin America and the Caribbean (up
by 2.2 percentage points for 2023), Emerging and
Developing Europe (up by 0.9 percentage point),
and Sub-Saharan Africa (up by 2.0 percentage
points for 2023).

Global trade growth is slowing sharply: from
10.1 percent in 2021 to a projected 4.3 percent in
2022 and 2.5 percent in 2023. This is higher growth
than in 2019, when rising trade barriers constrained
global trade, and during the COVID-19 crisis in
2020, but well below the historical average (4.6 percent for 2000–21 and 5.4 percent for 1970–2021).
The slowdown, which is 0.7 percentage point steeper
than that projected for 2023 in the July WEO
Update, mainly reflects the decline in global output
growth. Supply chain constraints have been a further
drag: the Federal Reserve Bank of New York’s Global
Supply Chain Pressure Index has declined in recent
months—largely because of a decrease in Chinese
supply delivery times—but is still above its normal
level, indicating continuing disruptions. Nevertheless, supply chains are complex, and pandemic-era
disruptions were a product of multiple factors. If
other factors continue to improve even as challenges
in China remain, supply-side pressures may continue to ease. The dollar’s appreciation in 2022—by
about 13 percent in nominal effective terms as of
September compared with the 2021 average––is
likely to have further slowed world trade growth,
considering the dollar’s dominant role in trade
invoicing and the implied pass-through in consumer
and producer prices outside the US (Gopinath and
others 2020).
Whereas global trade growth is declining, global
trade balances have widened. After shrinking during
2011–19, global current account balances—the sum of
all economies’ current account surpluses and deficits in
absolute terms—increased during the COVID-19 crisis
and are projected to rise further in 2022 (Figure 1.19).
The widening of balances has reflected the pandemic’s
impact. It has also, in 2022, mirrored the increase in
commodity prices associated with the war in Ukraine,
which has raised balances for oil net exporters and
reduced them for net importers (2022 External Sector
Report). A widening in global current account balances
is not necessarily a negative development, though
excessive global imbalances can fuel trade tensions and
protectionist measures or increase the risk of disruptive
currency and capital flow movements.
Creditor and debtor stock positions are expected
to remain elevated in 2022, although they have,
on average, moderated slightly from their 2020
peaks, because valuation changes have more than
offset the concurrent widening of current account
International Monetary Fund | October 2022

15

WORLD ECONOMIC OUTLOOK: COUNTERING THE COST?OF?LIVING CRISIS

Figure 1.19. Current Account and International Investment
Positions

Figure 1.20. Corporate Talk of Key Macroeconomic Risks
(Cumulative percent)

(Percent of global GDP)
In?ation
European creditors
China
Japan
Oil exporters

United States
Euro area debtors
Others
Discrepancy

Recession

Ukraine war

COVID-19

15 1. Advanced Economies
12

3 1. Global Current Account Balance

9

2
6

1

3

0

0
2021:Q1

–1

21:Q2

21:Q3

21:Q4

22:Q1

22:Q2

22:Q1

22:Q2

–2
15 2. Emerging Market and Developing Economies
–3
2005

07

09

11

13

15

17

19

21

23

25

27

12

30 2. Global International Investment Position
9
20
6

10

3

0
–10

0
2021:Q1

21:Q2

21:Q3

21:Q4

–20
–30
2005

07

09

11

13

15

17

19

21

23

25

27

Source: IMF staff calculations.
Note: European creditors = Austria, Belgium, Denmark, Finland, Germany,
Luxembourg, The Netherlands, Norway, Sweden, Switzerland; euro area debtors =
Cyprus, Greece, Ireland, Italy, Portugal, Slovenia, Spain; oil exporters = Algeria,
Azerbaijan, Iran, Kazakhstan, Kuwait, Nigeria, Oman, Qatar, Russia, Saudi Arabia,
United Arab Emirates, Venezuela.

balances. The 2022 decline in asset prices in the
US—the economy with the world’s largest net
liability position (external assets minus external
liabilities)—could cause valuation losses for foreign
holders of US assets. At the same time, however, US
dollar appreciation could lead to valuation gains in
emerging market and developing economies, which
tend to have long positions in foreign currency, while
increasing the burden of dollar-denominated public
sector debts.

Risks to the Outlook: The Downside
Still Dominates
Risks to the outlook continue to be on the downside. Overall, risks are elevated as the world grapples
16

International Monetary Fund | October 2022

Sources: NL Analytics; and IMF staff calculations.
Note: Each area in the ?gure shows the number of sentences in companies’
earnings calls that mention the respective risk as a percentage of the total number
of risk mentions.

with the impact of Russia’s invasion of Ukraine, a slowdown in economic activity as central banks ramp up
efforts to quell inflation, and the lingering pandemic.
The risks described in this section, if realized, are likely
to depress growth further and keep inflation higher for
longer. Some of these risks are currently top of mind
for the world’s largest firms as they navigate a highly
uncertain environment. While inflation is increasingly
important, firms still see COVID-19 as the dominant
risk (Figure 1.20). The continued high numbers of
COVID-19 mentions in firms’ earnings calls may
reflect the pandemic’s lingering effect on labor markets
and supply chains. Further complicating the outlook,
it is not at all straightforward how these risks influence
one another. They may well interact to magnify some
adverse effects. In what follows, the most prominent
risks and uncertainties surrounding the outlook are
discussed, followed by a model-based analysis that
quantifies the balance of risks to the outlook (Box 1.3).

CHAPTER 1

Figure 1. 1. ong er In?ation

e tations

(Percent; ?ve years ahead)
0.12 1. nited tates
June 2021
June 2022
Density

0.08

0.04

0.00
–10

0.15

–5

0
5
10
ive- ear in?ation e ectations

15

20

0
5
10
ive- ear in?ation e ectations

15

20

. nited ingdo
2021:Q2
2022:Q2

0.10
Density

• Policy mistakes: under- or overtightening monetary
policy—Major central banks must chart a difficult
course. A deteriorating growth outlook with subdued
consumer and investor sentiment sits somewhat awkwardly alongside still-tight labor markets. The major
economies are also seeing mixed economic readings,
such as contradictory signals in output and labor
markets in the US and tourism-supported strong
growth in Europe during the summer despite the
war’s impact. While conditioning policy on incoming
data, there is a risk that inflation expectations could
de-anchor if the fight against inflation loses momentum. So far, consumer inflation expectations seem to
remain anchored in major economies (Adrian, Erceg,
and Natalucci 2022). It is worth noting, however,
that disagreement among households regarding
the longer-term outlook for inflation is widening
and, in some cases, beginning to shift, with a larger
share of households expecting very high inflation
(Figure 1.21). The risk of policy mistakes—under- or
overtightening—is elevated in these conditions. Not
tightening enough may prove a costly mistake: it risks
causing inflation to become entrenched, prompting
a more hawkish future stance on interest rates at a
significant cost to output and employment. On the
other hand, overtightening risks sinking many economies into prolonged recession. The outlook already
projects a growing number of economies to be in
contraction in 2022–23 (Figure 1.14). Uncertainty
about the neutral rate of interest and potential transatlantic monetary policy divergence makes navigating
this narrow path complicated. Moreover, over- and
undertightening do not necessarily have symmetric
costs: a policy mistake that leads to spiraling inflation
would be the much more detrimental of the two. In
addition, uncertainty also clouds the natural level of
unemployment: the pandemic significantly changed
labor market dynamics in many advanced economies,
with low employment compared with pre-pandemic
trends coexisting with elevated labor market tightness.
Given the uncertain outlook, the coming months
are likely to test central banks’ mettle in rooting out
inflation. In this fight, advanced economy central
banks may be able to depend on a larger credibility
buffer. While central banks in emerging market economies and lower-income countries have made significant progress in policy strategy and communications
in recent years, gaps between these economies and
advanced economies persist (Unsal, Papageorgiou,
and Garbers 2022). Emerging market economies and

GLOBAL PROSPECTS AND POLICIES

0.05

0.00
–10

–5

ources: an of ngland n?ation ttitudes urve niversit of ichigan
urve s of onsumers and
staff calculations
Note: he vertical lines indicate the mean of each distri ution

lower-income countries may struggle more to defeat
inflation. In all cases, however, durably reducing inflation will depend crucially on monetary policymakers’
resolve to stay the course and avoid repeating the
stop-go cycle of the 1970s.
• Divergent policy paths and dollar strength—Divergences
in economic policies may continue to contribute to
US dollar strength, which could create cross-border
tensions. The course of monetary policy tightening in
the US and the euro area might continue to diverge
if inflation persists for longer and a sharp monetary
tightening proves difficult to implement in the euro
area in the presence of fragmentation risks. Another
dimension of macroeconomic policy divergence is
that among China, Japan, the United Kingdom, and
the US. In China, output growth has slowed with the
COVID-19 outbreaks and troubles in the property
sector, and with relatively benign inflation readings,
the central bank decided to reduce lending rates in
August. Japan’s policy rates could continue to remain
low, given the low underlying core inflation and weak
International Monetary Fund | October 2022

17

WORLD ECONOMIC OUTLOOK: COUNTERING THE COST?OF?LIVING CRISIS

wage growth. In September, the Japanese authorities
intervened to support the yen amid the currency’s
rapid depreciation and a widening monetary policy
divergence with the US. In the United Kingdom, the
announcement in September of large debt-financed
fiscal loosening, including tax cuts and measures to
deal with the high energy prices, was associated with a
rise in gilt yields (October 2022 Global Financial Stability Report) and a sharp currency depreciation that
was later reversed. Overall, policy divergences, and
any flight-to-safety effects should geopolitical tensions
rise, may cause further US dollar strength. In 2022
the dollar has already appreciated by about 15 percent against the euro, over 10 percent against the
renminbi, 25 percent against the yen, and 20 percent
against sterling. The associated currency movements
may add to cross-border tensions regarding competitiveness; stoke inflation in many economies, given the
predominance of dollar pricing in international trade;
and lead some countries to tighten policies further to
prevent excessive currency depreciation, with negative
effects on growth.
• Inflationary forces persisting for longer—Inflation is
projected to cool in 2023 and 2024, with the forces
shaping the outlook pointing to faster disinflation
in advanced economies than in emerging market
and developing economies (Figure 1.18). However,
several factors could delay the moderation of inflation
rates. Further shocks to energy and food prices could
keep headline inflation higher for longer. Energy
prices are and will remain particularly sensitive to the
course of the war in Ukraine and the potential flaring
up of other geopolitical conflicts. Sustained high
energy prices as well as the aforementioned currency
depreciation may also pass through to core inflation
and so warrant a more hawkish monetary policy
response. This would deepen the drag on growth
owing to higher costs of borrowing and depressed
disposable incomes. And extreme weather events
might undermine the global food supply, placing
upward pressure on the prices of foods that make up
a large part of diets, with dire consequences for the
world’s poorest countries. Higher-for-longer inflation
would also raise the risk of inflation de-anchoring or
a wage-price spiral persisting when expectations are
more backward-looking. So far, these risks appear
contained, partly because of more aggressive monetary tightening (see Chapter 2). Firms enjoying higher
markups might choose to absorb the increase in the
cost of intermediate goods (Box 1.2), but a prolonged
18

International Monetary Fund | October 2022

increase in input costs could prompt firms to pass on
higher costs to preserve margins. Although the risk
of this seems low, firms are increasingly regarding
inflation as a prominent risk (Figure 1.20). On the
upside, the current surge in inflation is partly related
to the stronger-than-anticipated demand recovery
from the pandemic shock (Box 1.1). With continued
tightness in labor markets, some advanced economies
seem to be at the steeper end of the supply curve.
This may support rapid disinflation, with lower
output and employment costs. Also, a combination
of a deteriorating growth outlook and efforts to ramp
up crude oil production by the largest producers may
soften energy-induced inflationary pressures.
• Widespread debt distress in vulnerable emerging
markets—The war in Ukraine has helped precipitate a
surge in sovereign spreads for some emerging market
and developing economies (Figure 1.3). This surge
comes amid record debt due to the pandemic. Should
inflation remain elevated, further policy tightening in
advanced economies may add pressure to borrowing
costs for emerging market and developing economies.
Some larger emerging market economies are well
positioned. But if sovereign spreads increase further,
or even just remain at current levels for a prolonged
period, debt sustainability may be at risk for many
vulnerable emerging market and developing economies, particularly those hit hardest by energy and
food price shocks. With a larger import bill, strained
fiscal budgets, and limited fiscal space, any loss of
access to short-term funding markets will have significant economic and social consequences. The poor
are particularly vulnerable, as fiscal policy support is
critical to shielding them from the impact of the food
inflation shock. A surge in capital outflows might
also cause distress in emerging market and developing economies with large external financing needs.
A widening debt crisis in these economies would
weigh heavily on global growth and could precipitate a global recession. Further US dollar strength
can only compound the likelihood of debt distress.
The weakening of national currencies in emerging
market and developing economies might trigger
balance sheet vulnerabilities in economies with large
dollar-denominated net liabilities, with immediate
risks to financial stability.
• Halting of gas supplies to Europe—The war in Ukraine
is still sending aftershocks through Europe and
global markets. The amount of Russian gas supplied
to Europe has fallen to about 20 percent of last

CHAPTER 1

year’s level, compared with 40 percent at the time
of the July 2022 WEO Update. The latest forecasts
incorporate the expectation that the volume will
decline further, to even lower levels, by mid-2024,
in line with major European economies’ energy
independence goals. Should Russia completely halt
gas supplies to Europe in 2022, energy prices would
likely increase further over the short term, placing
even more pressure on households, and would be
expected to cause headline inflation in the euro area
to remain elevated for longer. The economic impact
of the shock would—as analysis underlying the July
2022 WEO Update (Flanagan and others 2022, Lan
and others 2022) suggests––vary across the continent with the degree of dependence on Russian
gas imports and the ability to address infrastructure
bottlenecks to secure alternative gas shipments. The
likelihood and magnitude of possible supply shortfalls is smaller today than assessed in July, because
higher pipeline and LNG flows and gas demand
compression have led to faster-than-expected storage
accumulation in the EU in recent months. Countries
in central and eastern Europe—particularly the Czech
Republic, Hungary, and the Slovak Republic—might
face disruptions, given their dependence on Russian
gas and the potential difficulty of securing alternative gas supplies. Particularly cold temperatures or
insufficient gas demand compression this fall could
force energy rationing during the winter in Germany,
Europe’s largest economy, with drastic effects for
industry, weighing heavily on the euro area growth
outlook and with potential for negative cross-border
spillover effects. Of course, commodity prices might
also decline—perhaps if the global downturn is more
severe than expected—something that would have an
adverse impact on exporting countries.
• A resurgence of global health scares—While the latest
coronavirus variants are less deadly than earlier
ones and show far more manageable hospitalization
rates, they are also highly contagious. As such, the
COVID-19 pandemic is still taking a heavy toll on
the workforce, resulting in prolonged absenteeism,
reduced productivity, and falling output. Yet the
evolution of more aggressive and lethal coronavirus variants remains a risk for the global economy.
Regions where exposure to new variants is highest
and those, such as Africa, where vaccination rates
are still low are likely to bear a higher burden in
any pandemic resurgence (Figure 1.22). Similarly
concerning is the risk of new global health scares.

GLOBAL PROSPECTS AND POLICIES

Figure 1.22. Africa Least Vaccinated against COVID-19
(Percent, unless noted otherwise)
100

250

Total doses administered per 100 people (right scale)
Share of people with at least one dose
Share of people who are fully vaccinated

200

75

150
50
100
25

0

50

Africa

Asia

Europe

North
America

Oceania

South
America

Sources: Our World in Data; and IMF staff calculations.
Note: Latest data available are for September 13, 2022.

For instance, monkeypox currently represents a
public health emergency of international concern.
While a scenario in which a new pandemic emerges
has very low probability, the return to strict lockdowns could reduce demand for contact-intensive
services once more. Given squeezed household
budgets, there is little likelihood of a partial offset
through a rotation toward demand for goods.
While this might lessen inflationary pressures,
further outbreaks could instead magnify supply
chain bottlenecks, which are finally starting to ease.
The interplay between these two forces will shape
the inflation-output trade-off that central banks
now confront. Over the coming years, such risks, if
realized, would only deepen the pandemic’s human
capital scarring and bring productivity down.
• Worsening of China’s real estate woes—Growth in
China has weakened significantly since the start of
2022 and has been subject to downward revision
since the April 2022 lockdowns in Shanghai and
elsewhere and because of an expected slowdown in
global trade (Figure 1.23, panels 1 and 2). Downside risks to China’s growth recovery dominate the
outlook, with signs of a significant slowdown in the
real estate sector, historically an engine of growth for
China’s economy (Figure 1.23, panel 3). The decline
in real estate sales prevents developers from accessing
a much-needed source of liquidity to finish ongoing projects, putting pressure on their cash flows
and raising the possibility of further debt defaults.
International Monetary Fund | October 2022

19

0

WORLD ECONOMIC OUTLOOK: COUNTERING THE COST?OF?LIVING CRISIS

Figure 1.23. Slowdown in China
7 1. 2022 Growth Forecast
(Percent)

2. 2023 Growth Forecast
(Percent)

7

6

6

5

5

4
3
Jan.
2021

Consensus Forecasts
WEO
July
21

Jan.
22

4

Consensus Forecasts
WEO
Sep.
22

Jan.
2021

July
21

3
Sep.
22

Jan.
22

250 3. Real Estate Indicators
(Index)
Real estate ?rms: Dollar bond prices
Real estate transactions, seven-day average
200
CSI 300 Banks Index
Hang Seng Mainland Properties Index
150
100
50
0
Jan.
2021

Apr.
21

July
21

Oct.
21

Jan.
22

Apr.
22

July
22

Sep.
22

Sources: Bloomberg Finance L.P.; Consensus Economics; Wind Information (HK)
Co. Ltd.; and IMF staff calculations.
Note: For panels 1 and 2, Consensus Forecasts are monthly survey basis. For
panel 3, all series are indexed to 100 on January 1, 2021, except real estate
transactions, which are indexed to average 100 in 2021. WEO = World Economic
Outlook.

Concerned with the delay in the delivery of residential units, thousands of buyers are calling for a moratorium on mortgage payments that would lead to
forbearance and exacerbate the risk of nonperforming loans for banks, as well as the liquidity squeeze
developers face. Uncertainty about the property
sector could also have an impact on consumption
and local government finances. A further intensification of negative feedback loops between housing
sales and developer stress risks a larger and more
protracted real estate adjustment. This would be a
large blow, given that the real estate sector makes
up about one-fifth of GDP in China. Furthermore,
the potential for banking sector losses may induce
broader macro-financial spillovers that would weigh
heavily on China’s medium-term growth.
• Fragmentation of the world economy hampering
international cooperation—The Russian invasion
of Ukraine fractured relations between Russia
and many other countries. New geopolitical
20

International Monetary Fund | October 2022

tensions—in east Asia and elsewhere—are also
becoming more likely. Such tensions risk disrupting trade and eroding the pillars of multilateral
cooperation frameworks that took decades to build.
While the recent Black Sea grain deal bodes well
for increasing the supply of commodities to global
markets and is a positive step for international
diplomatic efforts, the risks of the world economy
fragmenting further are real and could weigh on
the outlook, especially over the medium term (the
next three to five years). Backtracking on the Black
Sea grain deal might lead to a food security crisis,
most notably in low-income countries. Further
fragmentation in global cooperation would create a
significant risk for climate change policy cooperation. Heightened tensions might also see the world
fragmenting into different spheres of geopolitical
influence, with adverse impacts on global trade and
capital flows.
• Globally consistent risk assessment of the WEO
forecast—Confidence bands for the WEO forecast
for annual global growth are obtained using the
G20MOD module of the IMF’s Flexible System of
Global Models. For some regions, the WEO forecast
has asymmetric confidence bands, skewed toward
lower growth than in the baseline. This skewing
reflects the preponderance of negative growth
surprises in the past. The resulting risk assessment,
displayed in a fan chart, can also be used to calculate
the probability of a global economic downturn.
The estimated probability of one-year-ahead global
growth below 2.0 percent—an outcome that has
occurred on only five occasions since 1970 (in 1973,
1981, 1982, 2009, and 2020)—now stands at about
25 percent: more than double the normal probability (Box 1.3). The probability of negative per capita
real GDP growth in 2023 is more than 10 percent.
Such a weak growth outcome could occur if, as
Box 1.3 explains, a plausible combination of shocks
were to materialize, including unexpected reductions
in global oil supply, a further weakening in China’s
real estate sector, persistent labor market disruption,
and tighter global financial conditions.

Policy Actions: From Inflation to Growth
Although the economic environment is one of the
most challenging in many years, difficult times need
not last forever. Judicious policy choices can help
guide the global economy out of inflation and into an

CHAPTER 1

era of sustainable and inclusive growth. Such policies
have impacts and interactions in the short, medium,
and long term.

GLOBAL PROSPECTS AND POLICIES

Figure 1.24. Natural Rate of Interest, United States
(Percent)
Natural rate of interest, Kalman
?lter estimate
Real interest rate

10
8

Policies with Immediate Impact

6

Fighting inflation: The priority must be to tackle
inflation, normalize central bank balance sheets, and
raise real policy rates above their neutral level fast
enough and for long enough to keep inflation and
inflation expectations under control. Fiscal policy
also needs to support monetary policy in softening
demand in economies with excess aggregate demand
and overheating labor markets. Without price stability, any gains from future growth are at risk of being
eaten up by a renewed Cost of Living squeeze. Central
banks need to act resolutely while communicating
clearly the objectives and the steps to achieve them
(October 2022 Global Financial Stability Report). Yet
taming inflation will come at a cost: unemployment
will rise and wages will decline as monetary policy
tightens. The appropriate path of anti-inflation policies
will be country-specific and depend crucially on the
following issues:
• The timing of the costs and benefits of disinflation:
The costs of monetary contraction tend to come
before the benefits. The last major US disinflation
began in 1980 and brought an almost immediate
recession. But inflation took about three years to
fall to manageable levels. More systematic evidence
points to similar conclusions. Monetary policy
seems to have its peak impact on real variables after
about one year, but on inflation after closer to three
to four years (Coibion 2012; Cloyne and Hürtgen
2016). This lag between the near-term costs of
disinflation policies and their longer-term benefits
poses credibility challenges for monetary policymakers, who may expect to receive calls to ease off
monetary tightening amid job losses and continued
inflation. And if the interest rate consistent with stable inflation (often termed the “natural rate of interest”) is higher than previously believed, the costs of
disinflation—and the pressures to slow the pace of
tightening—will be correspondingly higher. Indeed,
some evidence suggests this has already occurred
in the US. Although real rates are low, historical
relationships between output and inflation are not
consistent with the observed increase in inflation
alone; instead, it seems possible that the natural rate
may have increased slightly, loosening the stance of

4
2
0
–2
–4
–6
–8
1960

70

80

90

2000

10

22:
Q2

Sources: Federal Reserve Bank of Philadelphia, Survey of Professional Forecasters
(SPF); Holston, Laubach, and Williams (2017); and IMF staff calculations.
Note: The Kalman ?lter estimate is computed from the model of Holston, Laubach,
and Williams (2017). Shaded range indicates 95 percent con?dence interval. Real
interest rates are computed using SPF forecasts of in?ation.

policy further (Figure 1.24), although there is still
a great deal of uncertainty about the natural rate
at medium- and long-term horizons. In any case,
central banks must stay the course to ensure that
inflation durably declines. In this, qualitative forward guidance on objectives and reaction functions
will remain valuable. Yielding to pressure to slow the
pace of tightening will only undermine credibility,
allow inflation expectations to rise, and necessitate
more aggressive and painful policy actions later. By
reversing course, monetary policymakers will deliver
only the pain of tightening, with none of the gain.
Moreover, in some economies, slowing the pace of
monetary tightening could exacerbate the risks associated with policy divergences. Finally, supply-side
efforts can support monetary policy in reducing
inflation. Policies to prevent supply shortages will
ease pressure on inflation as demand recovers and
include upgrading transportation infrastructure,
pandemic preparedness, and creating more reliable
and resilient supply chains. In turn, long-lasting
supply shocks may also necessitate policy responses.
• International capital flows: Tighter financial conditions and fear of global recession influence global
capital flows, often with negative consequences for
emerging market and developing economies. There
has been a surge in the US dollar, which in real
terms has risen to highs not seen since the early
International Monetary Fund | October 2022

21

WORLD ECONOMIC OUTLOOK: COUNTERING THE COST?OF?LIVING CRISIS

Figure 1.25. Broad-Based Dollar Appreciation

Figure 1.26. Change in Cyclically Adjusted Primary Balance

(Index, 2010 = 100)

(Percentage points)

160

6
4

140

United States
Euro area
Japan

Other AEs
China
Other EMDEs

2
0

120
–2
–4

100

–6
80
1980

85

90

95

2000

05

10

15

20 Jul.
22

Source: IMF staff calculations.
Note: Figure shows real effective exchange rate of US dollar based on consumer
prices.

2000s (Figure 1.25). Higher US interest rates and the
strong dollar will raise financing costs for emerging market and developing economies, which are
already generally facing real rates higher than those in
advanced economies. It will also make dollar-invoiced
imported goods more expensive, boosting inflation.
In this context, the policy response recommended
by the IMF’s Integrated Policy Framework, both in
a prudential manner as well as during the shock,
depends on country-specific circumstances. For
countries with deep foreign exchange markets and
low foreign currency debt, relying on the policy rate
and exchange rate flexibility is appropriate. On the
other hand, if foreign exchange markets are shallow,
the turn in the global financial cycle may be associated with “taper tantrums” as portfolio-constrained
investors sell domestic currency assets. In such cases,
it would be appropriate to conduct foreign exchange
intervention or loosen inflow capital flow management measures (CFMs), instead of moving monetary and fiscal policy away from their appropriate
settings. For countries with large foreign currency
debts, outflows may generate systemic financial
stability risks and a tail risk in growth outcomes. It
may be appropriate in certain circumstances for such
countries to use preemptive capital flow management
or macroprudential measures (measures that are both
CFMs and or macroprudential measures) to reduce
their foreign exchange mismatches and to diminish
the probability and severity of subsequent capital
22

International Monetary Fund | October 2022

–8
2019

20

21

22

23

Source: IMF staff calculations.
Note: Each line denotes change in cyclically adjusted primary balance in percent of
GDP series from the previous period. “Other AEs” and “Other EMDEs” comprise 11
and 15 economies, respectively. AEs = advanced economies; EMDEs = emerging
market and developing economies.

flow reversals. In crisis or near-crisis circumstances,
outflow CFMs may be considered. Foreign exchange
intervention and inflow CFMs may also be appropriate in emerging market economies in which inflation
expectations are at high risk of de-anchoring owing
to sharp exchange rate depreciations.
• Monetary and fiscal policy coordination: Following a
broad loosening of public purse strings during the
pandemic, tightening is expected in 2022 and 2023
(Figure 1.26). However, in a number of countries, fiscal policy is expected to loosen, potentially
boosting aggregate demand and offsetting monetary
policy’s disinflationary effect. This is not to say that
fiscal policy cannot cushion the disinflationary transition’s impact on the vulnerable (more on this topic
in the next subsection). Although targeted redistributive policies may be appropriate, deficits should
be reduced to help tackle inflation and address debt
vulnerabilities. Fiscal consolidation can also send
a powerful signal that policymakers are aligned in
their fight against inflation. Countries will need to
make difficult choices in the composition of spending, given the need to keep a tight fiscal stance. For
example, the Cost of Living crisis may put pressure on
governments to approve above-inflation public sector
pay deals. Without fiscal contraction elsewhere, and
with tight supply, unfunded government spending
increases or tax cuts will only push inflation up further and make monetary policymakers’ jobs harder.

CHAPTER 1

Protecting the vulnerable during the adjustment: As
the cost of living continues to rise, policymakers will
need to protect the most vulnerable members of society from the impact of higher prices. Poorer households often spend relatively more than others on food,
heating, and fuel: categories that have seen particularly
steep price increases. Moreover, households cannot
easily adjust consumption to minimize spending on
these products; everyone must eat and use heating,
and transportation (whose price is often determined
largely by fuel costs) is often essential to get to work.
In countries with well-developed social safety nets,
targeted cash transfers to those particularly exposed to
higher energy and food prices (such as children and
older people) and existing automatic stabilizers (for
example, unemployment insurance) are the best ways
to limit the impact on those least able to bear it. However, measures to limit the inflationary impact should
offset any increase in new spending. In countries
lacking well-developed safety nets, governments should
look to extend any already active programs. In general,
broad price caps or food and energy subsidies should
be avoided, as they increase demand while diminishing or removing supply incentives. This can result in
rationing and an unbridled underground economy.
Moreover, such programs are often expensive and
regressive, funneling public cash to those who consume
the most rather than to those with the greatest need
(see the October 2022 Fiscal Monitor).
Warding off pandemic risks: COVID-19 continues to
have long-lasting effects on the global economy. Even
though many of the new variants are less deadly than
early ones, they continue to have considerable economic impact. Although strict lockdowns are increasingly rare, the disease continues to cause economic
disruption, as businesses may struggle to adapt to
unpredictable absences when workers or their family
members fall sick. As the virus persists and continues
to evolve, ensuring equitable access to a comprehensive
toolkit of vaccines, tests, and treatments worldwide
is the best strategy not only to save lives, but also to
reduce a key source of uncertainty holding back the
global recovery. Regarding vaccinations, the primary
focus should be on fully vaccinating the most clinically vulnerable populations. Ongoing investments in
research, disease surveillance, and health systems will
also be needed to keep a broad set of tools updated as
the virus evolves.
The impact of the pandemic is perhaps most keenly
felt in China, where intermittent lockdowns in parts

GLOBAL PROSPECTS AND POLICIES

Figure 1.27. Debt in Distress in Emerging Market and
Developing Economies
(Percent)
70 1. Weighted Average
Debt-to-GDP Ratio
60

2. Country Share of World GDP

5
4

50
40

3

30

2

20
1

10
0

Distressed

Stressed

5 3. Debt in Percent of EMDEs’
GDP

Distressed

Stressed

4. Debt in Percent of EMDEs’
Total Debt

4

0
8
6

3
4
2
2

1
0

Distressed

Stressed

Distressed

Stressed

Source: IMF staff calculations.
Note: roups are classi?ed based on sovereign spread data as of eptember ,
2022. istressed group indicates economies with spreads greater than ,000
basis points stressed group indicates economies with spreads of 00 ,000
basis points.
s emerging mar et and developing economies.

of the country have continued to affect economic
activity. Temporary disruptions to domestic logistics
and supply chains during the largest outbreaks, besides
being a drag on private consumption, have hit the
country’s manufacturers, adding to existing pressures
on global supply chains. The recurring outbreaks stress
the importance of paving the way for a safe exit from
China’s zero-COVID strategy, including by adding to
the country’s successful vaccination campaign, especially for the undervaccinated elderly.

Policies with Payoffs in the Medium Term
Improved frameworks for debt resolution: Some countries will find their fiscal sectors under considerable
pressure, with rising interest rates, a coming global
slowdown, and towering pandemic-era debts. Although
those most exposed account for only a small share
of global output and financial assets (Figure 1.27),
spillover effects—most notably contagion, in which
a crisis in one country induces investors to run from
International Monetary Fund | October 2022

23

0

WORLD ECONOMIC OUTLOOK: COUNTERING THE COST?OF?LIVING CRISIS

similar assets elsewhere—can be significant. While the
best solution is always an orderly adjustment within a
well-founded medium-term fiscal strategy, driven by
domestic policy priorities, the likelihood is that more
countries will enter debt distress. In such cases, cooperative global policies are essential to stop the spread
of crises and can be achieved preferably by setting up
appropriate mechanisms or institutions in advance.
The IMF, as one such institution, stands ready to
support countries with temporary balance-of-payments
difficulties in accordance with IMF policies. But
other complementary approaches should be developed
further. In particular, the common debt resolution
framework of the Group of Twenty (G20) can be
improved to allow swift and fair resolution in cases of
distressed debt, enabling countries to get out of default
without extended economic pain. Recent progress in
regard to Zambia is welcome, but more is needed.
Coverage should be expanded to include a broader set
of countries, and creditor committees need to meet
and formulate agreements swiftly and transparently.
Debt distress in emerging market and developing
economies is a growing problem. It is imperative that
a well-functioning G20 debt resolution mechanism be
put in place as soon as possible.
Preparing for tighter international financial conditions:
Tightening monetary policy may also put pressure
on financial institutions. The best time to prepare for
a tightening of financial conditions is now. As the
economy slows, default rates rise and income from
new loans decreases. Although higher rates may boost
interest income, they are likely to have a negative effect
overall on many institutions. As such, macroprudential policy will need to become ever more vigilant,
guarding against the failure of systemic institutions,
using selected instruments to address pockets of
elevated vulnerability (see the October 2022 Global
Financial Stability Report). In particular, the housing
market remains a potential source of macro-financial
risk; authorities should assess the systemic effects of a
correction in house prices through rigorous stress tests.
In China, authorities should enable the restructuring
of troubled housebuilders and prepare to tackle the
housing market’s impact on the financial system more
broadly. Tighter international financial conditions may
also put pressure on currency exchange rates. Depending on country circumstances and the nature of shocks,
policymakers should be ready to step in when flexible
exchange rates alone are unable to absorb external
shocks. For instance, crises may require policymakers
24

International Monetary Fund | October 2022

to intervene in foreign exchange markets or introduce capital flow management measures. However,
such measures should be strictly temporary, with
well-defined goals. And governments with high debt
should preemptively reduce reliance on foreign currency borrowing. Prompt and reliable access to reserve
currency liquidity—including through IMF precautionary and disbursing arrangements—gives countries
breathing room to implement adjustment policies in
an orderly manner. Finally, competing pressures in the
euro area make a well-designed European Central Bank
facility, such as the Transmission Protection Instrument, more of a necessity to support a smooth monetary transmission. This will help policy interest rates
better reflect macroeconomic conditions across the
euro area. Such an instrument should complement the
existing conditional Outright Monetary Transactions
instrument and the European Stability Mechanism’s
lending program. At the same time, it should not
distort markets so much that prices no longer reflect
fundamental risks.
Structural reforms: Policies that expand supply
can boost economic activity while easing inflation,
though with somewhat of a lag. In advanced economies, such policies include those that expand the
workforce, such as childcare subsidies, earned income
tax credits, reformed immigration systems, and better
access to COVID-19 vaccinations and treatment. In
emerging market and developing economies, better
education, business climates, and digital infrastructure
can also help.

Policies with Longer-Term Benefits
Climate policies: Climate change continues apace.
Extreme temperatures are but one manifestation of
the challenges such change presents. Without prompt
remedial action, climate change will eventually have
catastrophic impacts on health and economic outcomes
the world over. Current global targets are not aligned
with global temperature goals. Meeting these goals will
require emission cuts of at least 25 percent by the end
of the decade (Chapter 3). The ongoing energy crisis
has also sharpened the energy security benefits countries can derive from transitioning to clean and reliable
energy sources to steadily replace their reliance on fossil
fuels with renewables and low-carbon energy sources.
To accelerate this transition, governments should both
set a minimum price for carbon and promote clean
alternatives, including subsidies for renewables and

CHAPTER 1

investment in enabling infrastructure such as smart
grids. In a world of already-high prices, shifting to
new energy sources may be politically challenging and
apparently risky. But policies to offset the cost of the
transition, such as feebates and targeted compensation for those losing out, can help ease the transition.
And although the green transition may entail risks,
these are minimal compared with the risk of doing
nothing. Indeed, new IMF analysis highlighted in
Chapter 3 suggests that the cost of the transition to
clean electricity need not be inflationary and can be
achieved with impacts on GDP that are smaller than
the annual variation in normal times. Delay will only
cause those costs to rise. The passage of the Inflation
Reduction Act in the US, which includes $369 billion
for energy security and climate change policies, is welcome. The law aims to reduce US carbon emissions by
about 40 percent by 2030, mostly through tax credits
and incentives to increase investment in clean energy.
Yet the omission of broad-based carbon pricing and
sectoral feebates, as well as any elimination of subsidies
for fossil fuel and carbon-intensive agriculture, still
leaves room for improvement. Likewise, the sizable
energy package announced by the UK government,
aimed at assisting all families and businesses dealing
with high energy prices, has scope for better targeting

GLOBAL PROSPECTS AND POLICIES

the vulnerable, which would lower the cost of the
package and better preserve incentives to save energy.
Strengthening multilateral cooperation and avoiding
fragmentation: The recent spike in global inflation
has prompted a corresponding wave of short-term
protectionism, most notably in regard to food. And
although protectionist policies may be appealing
in the short term, there are ultimately no winners.
When countries ban exports, they deny themselves
the income to buy other goods they might need from
abroad. Moreover, export bans in one country often
provoke retaliatory bans elsewhere, leaving all parties worse off. A similar principle applies to medical
products, which have been subject to trade restrictions
at various times during the pandemic. Governments
should unwind pre-pandemic trade restrictions and
follow through on their commitment to World Trade
Organization reform. This includes restoring a fully
functioning dispute settlement system and enhancing
rules in areas such as agricultural and industrial subsidies. In addition, multilateral cooperation is essential
to the advance of technologies to support climate
change mitigation and boost green financing. Also,
support for low-income countries through concessional
funding is needed to catalyze growth-enhancing reform
and help them meet their climate targets.

International Monetary Fund | October 2022

25

WORLD ECONOMIC OUTLOOK: COUNTERING THE COST?OF?LIVING CRISIS

Box 1.1. Dissecting Recent WEO Inflation Forecast Errors
Inflation has repeatedly exceeded World Economic Outlook (WEO) forecasts during 2021–22 across geographic
regions by an abnormally high amount. The forecast
errors were generally larger for 2022 than for 2021, but
those for core inflation were less prominent for 2022.
Larger-than-expected demand recovery in advanced economies and emerging market and developing economies
partly explains core inflation forecast errors for 2021,
with COVID-19 fiscal stimulus packages likely playing a
supporting role in advanced economies.
Inflation has surprised consistently on the upside
since the second quarter of 2021. This has led to
successive upward revisions in WEO inflation forecasts
(Figure 1.1.1) for both headline and core inflation and
for both advanced and emerging market and developing economies. The October 2022 WEO forecast
views inflation in advanced economies as peaking
later than expected in the January WEO Update and
April 2022 WEO. Headline inflation in emerging
market and developing economies is now expected to
peak higher, yet not later, than previously thought.
Inflation forecast errors are larger for 2022 than
those for 2021.1 The increase for 2022 is especially
large for economies in Europe (Figure 1.1.2). The
errors realized for 2021 and 2022, which average
1.7 percentage points for Europe and 3.2 percentage
points globally, compare with a near-zero average for
the decade that preceded the COVID-19 crisis. The
root-mean-square error is 2.5 times larger for 2021
and 5 times larger for 2022 than it was for 2010–19.
The large 2022 inflation surprises for emerging Europe
are due to exceptionally high realized inflation in Baltic and other eastern European states as a result of the
Russian invasion of Ukraine. Only China and the US
saw smaller errors for 2022 than for 2021. China faces
an economic slowdown, putting downward pressure
on inflation. The US has seen a significant upward
revision to the inflation forecast in the January 2022
The authors of this box are Christoffer Koch and
Diaa Noureldin.
1The forecast error in a given year refers to the difference
between the actual realization and the forecast issued at the start
of the year (January WEO Update). Since actual inflation is yet
to be realized for 2022, “forecast error” here refers to the forecast
revision for 2022 annual inflation made in the October 2022
WEO relative to the January 2022 WEO Update. A positive
“forecast error” for a particular country for 2022 thus indicates
that 2022 inflation is projected (as of October 2022) to be
higher than anticipated at the start of 2022.

26

International Monetary Fund | October 2022

Figure 1.1.1. Headline In?ation Forecasts
(Percent)
Oct. 2022 WEO
Apr. 2022 WEO
Oct. 2021 WEO
Apr. 2021 WEO

Jul. 2022 WEO Update
Jan. 2022 WEO Update
Jul. 2021 WEO Update
Jan. 2021 WEO Update

12 1. Advanced Economies
10
8
6
4
2
0

2020

21

22

23:
Q4

12 2. Emerging Market and Developing Economies
10
8
6
4
2
0

2020

21

22

23:
Q4

Source: IMF staff calculations.
Note: The lines plot the four-quarter purchasing-powerparity-GDP-weighted in?ation forecasts from the January
2021 WEO Update to the October 2022 WEO. WEO = World
Economic Outlook.

WEO Update, as early signs of overheating were
evident from the elevated core inflation readings since
the second quarter of 2021 and from increasingly tight
labor markets.2 Evidence also shows that forecasts of
inflation’s persistence may have been understated. On
average, an additional 1 percentage point inflation
surprise for 2021 is associated with an additional
2See Ball, Leigh, and Mishra (forthcoming) for a discussion of
labor market tightness and its impact on inflation in the US after
the pandemic. See also Duval and others (2022) for evidence for
selected advanced economies.

CHAPTER 1

GLOBAL PROSPECTS AND POLICIES

Box 1.1 (continued)
Figure 1.1.2. WEO Annual Headline Forecast
Errors with Respect to Preceding January WEO
Updates

Figure 1.1.3. ore In?ation and ut ut
Fore ast rrors
(Percentage points)

(Percentage points)
inear ?t
re- andemic hilli s curve estimate

Emerging Europe
Advanced Europe
World
LAC
AEs
SSA
LIDCs
EMMIEs
ME&CA
US
Dev. Asia ex. China
China

ore in?ation forecast error

2010–19
2021
2022

6
4
2
0
2
–4
–6
–5 –4 –3 2

0

1 2 3 4 5
Mean forecast errors

6

7

8

Source: IMF staff calculations.
Note: Mean in?ation forecast errors from January 2021 WEO
Update for 2021 in?ation and January 2022 WEO Update for
2022 in?ation compared with respective mean forecast errors
with respect to January WEO Updates from 2010–19. Withingroup forecast errors are weighted by purchasing power
parity. AEs = advanced economies; Dev. Asia ex. China =
developing Asia excluding China; EMMIEs = emerging market
and middle-income economies; LAC = Latin America and
Caribbean economies; LIDCs = low-income developing
countries; ME&CA = Middle Eastern and Central Asian
economies; SSA = sub-Saharan African economies.

subsequent forecast error of 0.22 percentage point
for 2022. The relationship is statistically significant
(t-statistic = 2.68). Since the forecast error for 2021
was known when the forecasts for 2022 were made, it
should not in principle be correlated with subsequent
forecast errors.
Core inflation drove inflation forecast errors for
2021, but less so for 2022. Core inflation forecast
errors represented the bulk of errors for 2021, at
53.6 percent for advanced economies and 71.9 percent for emerging market and developing economies.
In regard to 2022, the core inflation contribution is
lower, at 46.5 percent for advanced economies and
47.9 percent for emerging markets. The large contribution of core inflation forecast errors for 2021 likely
reflects wide demand-supply imbalances as the strong
demand recovery from the COVID-19 shock hit
persistent supply disruptions, a topic that is explored
later in this box. On the other hand, the inflation

0
2 3 4 5 6 7 8 9
ut ut gro th forecast error

0

0
2 3 4 5 6 7 8 9
ut ut gro th forecast error

0

0 2. 2022
ore in?ation forecast error

–2 –1

8 1. 2021

World 2022
forecast errors

8
6
4
2
0
2
–4
–6
–5 –4 –3 2

ource:
staff calculations
Note: utlier o servations e cluded if the a solute forecast
errors e ceed 0 ercentage oints ussia and raine are
e cluded in 2022 egression is
– D eighted using
eights for 202 in anel and eights for 2022 in anel 2
u le si e indicates the si e of the econom according to
the
– D eights
urchasing o er arit

errors for 2022 are relatively more concentrated in
noncore inflation, suggesting a stronger role for energy
and food supply-side shocks, in large part due to the
war in Ukraine.
Can the stronger-than-anticipated demand recovery partly explain core inflation forecast errors? A
scatterplot of the respective forecast errors shows a
positive association between output and core inflation
surprises for 2021 (Figure 1.1.3, panel 1). The line
of best fit (weighted by purchasing-power-parity
GDP) traces out a Phillips curve relationship with a
greater slope compared with that of the pre-pandemic

International Monetary Fund | October 2022

27

WORLD ECONOMIC OUTLOOK: COUNTERING THE COST?OF?LIVING CRISIS

Box 1.1 (continued)

3The pre-pandemic estimate is based on a hybrid Phillips
curve specification during 2000–19. See Chapter 2 of the
October 2021 WEO for further details.

28

International Monetary Fund | October 2022

Figure 1.1.4. Impacts on Core In?ation
Forecast Errors

Core in?ation forecast error

Core in?ation forecast error

(Percent)
10 1. Core In?ation Forecast Errors versus
COVID-19 Fiscal Impulse, 2021
8
AEs EMDEs
Linear ?t
6
4
AUS USA
CAN
2
0
GBR
–2
–4
–6
0
5
10
15
Fiscal impulse (percent of GDP)

20

4 2. Core In?ation Forecast Errors versus Labor
Market Tightness, 2021
Linear ?t
3
CAN USA

2

AUS
1

GBR

0
–1
0.5

Core in?ation forecast error

Phillips curve estimate.3 This suggests the global
economy may have been at the steeper end of the
aggregate supply curve in 2021, as the rapid demand
recovery met continually disrupted supply. The
July 2021 WEO Update and October 2021 WEO
documented the strength of the demand recovery.
Advanced economies showed a noticeably strong
recovery in output (manufacturing and services).
Also, supply strain was at its worst in the second half
of 2021, as indicated by purchasing managers’ index
supply delivery times. For 2022 core inflation forecast
errors, the line of best fit is flatter and nonsignificantly different from the slope of the pre-pandemic
Phillips curve (Figure 1.1.3, panel 2).
The strong association between inflation and
output forecast errors for 2021 likely reflects, in part,
the COVID-19 fiscal stimulus packages and tight
labor markets, particularly in advanced economies.
Ambitious fiscal stimulus packages in reaction to the
pandemic shock likely boosted demand recovery in
2021. With interest rates at the zero lower bound in
most advanced economies, policymakers resorted to
fiscal policy to cushion the impact of the pandemic
shock and avert long-term scarring. Figure 1.1.4
(panel 1) shows a wide range of magnitudes of fiscal
packages announced in 2020, based on the Database of Country Fiscal Measures in Response to the
COVID-19 Pandemic (January 2021 Fiscal Monitor
Update). A number of large economies (for example,
Japan, the UK, and the US) committed to spending
in excess of 15 percent of GDP in response to the
pandemic. The overall scatterplot does not exhibit
a strong positive association, confirming that other
factors are also at play, yet advanced economies
show a strong relationship between inflation forecast errors and fiscal packages. For advanced economies, an additional 10 percent of GDP in fiscal
support is associated with a 0.8 percentage point
larger-than-expected core inflation rate (t-statistic =
3.38). In real time, forecasters likely underestimated
fiscal packages’ impact on inflation in those economies. Supply disruptions were not visible merely in
the market for goods and in clogged global supply
chains: the pandemic and subsequent rapid demand
rebound also squeezed domestic labor markets. To
highlight the relationship between labor markets and

1.0
1.5
2.0
Vacancies/unemployment, 2021 versus 2020

2.5

3 3. Core In?ation Forecast Errors versus
Relative Goods In?ation, 2021
2

AUS

CAN
GBR

1

USA

0
Linear ?t

–1
1.0
1.5
2.0
2.5
–0.5
0.0
0.5
atio of year over year core goods to services in?ation in 202
Source: IMF staff calculations.
Note: In panel 1, “?scal impulse” refers to the announced
COVID-19 ?scal support packages in 2020. The solid line is a
linear ?t of a weighted regression for advanced economies, in
which the weights are the 2021 PPP GDP. In panel 2, the linear
?t uses 2021 PPP GDP weights. In panel 3, regression is
PPP-GDP weighted using weights for 2021. All three panels
exclude outlier observations if the absolute forecast errors for
core in?ation or output growth exceed 10 percentage points.
AEs = advanced economies; EMDEs = emerging market and
developing economies; PPP = purchasing power parity. Data
labels in the ?gure use International Organization for
Standardization (ISO) country codes.

CHAPTER 1

GLOBAL PROSPECTS AND POLICIES

Box 1.1 (continued)
core inflation forecast errors, the ratio of vacancies
to unemployment in 2021 relative to that in 2020 is
computed. This ratio displays a positive relationship
with inflation forecast errors (Figure 1.1.4, panel 2).
A regression accounts for more than 50 percent of the
error variations. Finally, Figure 1.1.4 (panel 3) highlights the role of reshuffling of sectoral demand from
services to goods. It plots the ratio of core goods inflation to services inflation in 2021, which was about

2.5 in the US, against core inflation forecast errors
in 2021. The positive correlation suggests a role for
sectoral demand dislocations in driving unanticipated
inflation aberrations. Overall, the patterns in regard
to fiscal impulses, labor market tightness, and sectoral
shifts are consistent with the notion that fiscal policy
supported buoyant demand, when the economy’s
supply side was still impaired, and so contributed
meaningfully to inflation forecast misses.

International Monetary Fund | October 2022

29

WORLD ECONOMIC OUTLOOK: COUNTERING THE COST?OF?LIVING CRISIS

Box 1.2. Market Power and Inflation during COVID-19
Is corporate market power behind the current wave
of inflation? With consumer price growth surging in
2021 and 2022 across numerous advanced economies,
this question is at the forefront of policy and academic
debates. One potential explanation is that firms take
advantage of low competition to shield profits by
passing rising input and labor costs on to households
through higher prices. This box, however, presents new
evidence suggesting that market power has not contributed substantially to inflation at the current conjuncture.
Profits rebounded in 2021 after taking a hit in
2020. Some of the recovery may have resulted from
firms’ charging higher prices. Decomposing GDP
deflator growth into factor income growth shows that
the private sector’s gross operating surplus, which
includes profits, has been an important driver of
higher output prices in several advanced economies,
alongside rising unit labor costs (Figure 1.2.1). In
the US, where the GDP deflator increased 7 percent
between 2019 and 2021, roughly 40 percent of this
increase can be attributed to rising gross operating surplus, while rising employee compensation accounts for
65 percent. In contrast, production taxes, the decomposition’s final component, contributed negatively,
reflecting fiscal support during COVID-19. Other
advanced economies show similar patterns.
While market power has grown steadily over the
past decades in several advanced economies (Díez,
Leigh, and Tambunlertchai 2018; April 2019 World
Economic Outlook, Chapter 2), the recent rise in profits
and prices does not necessarily mean that market
power has increased further during the pandemic. A
variety of other channels could be driving rising profits, such as higher demand or a (temporary) decline in
firms’ capital expenditures.
To shed light on market power’s role in the recent
inflationary wave, this box estimates markups for
nine advanced economies (Australia, Canada, France,
Germany, Italy, Japan, Spain, UK, US) during
2000–21 based on Worldscope data on publicly
traded nonfinancial firms.1 These markups—defined
The authors of this box are Federico Díez, Longji Li, Myrto
Oikonomou, and Carlo Pizzinelli.
1The financial sector is excluded, because markups estimated
from a traditional production function may not be the best measure
of market power for financial institutions (see Akcigit and others
2021). Konczal and Lusiani (2022) find that 2021 growth in markups in the financial sector was substantially higher than that in other
industries. In contrast to those from Worldscope, national accounts
data, used in Figure 1.2.1, encompass the entirety of the economy.

30

International Monetary Fund | October 2022

Figure 1. .1. Deco osition o D De?ator
Growth by Income Components
(Percent)
Gross operating surplus
Net tax change
Compensation of employees
P de?ator cumulative growth
0

5

0

–5

Canada

United States

United
Kingdom

uro area

ources: aver Analytics rganisation for conomic
Co operation and evelopment and F staff calculations.
Note: lac diamonds report the aggregate growth in the
P de?ator from the fourth uarter of 20 to the fourth
uarter of 202 . ach stac ed bar computes the contribution
of the respective income component by multiplying the
component s share of P in the fourth uarter of 20 by
the difference between the component s nominal growth
rate and the growth rate of aggregate real P.

by the price-to-marginal-cost ratio—are common
indicators of market power. The analysis follows
closely the methodology of De Loecker, Eeckhout,
and Unger (2020) and Díez, Leigh, and Tambunlertchai (2018).2
Figure 1.2.2 shows that, as discussed in earlier studies (April 2019 World Economic Outlook, Chapter 2;
Akcigit and others 2021), markups increased steadily
across advanced economies in the past decades,
suggesting long-term consolidation of firms’ market
power.3 However, during the pandemic, markup
2A key assumption of this method is that firms face an unconstrained short-term supply of intermediate goods and labor. The
assumption of flexible inputs is reasonable even under some
labor market rigidities and amid recent supply chain disruptions:
the cost-of-goods-sold measure used for the estimation encompasses a diverse basket of labor and intermediate goods, resulting
in a flexible composite of inputs.
3These results should be interpreted with caution because,
while listed firms account for a sizable share of output (especially
in the US), evidence shows that privately held firms have different markup dynamics (Díez, Fan, and Villegas-Sánchez 2021).

CHAPTER 1

GLOBAL PROSPECTS AND POLICIES

Box 1.2 (continued)
Figure 1.2.2. Sales-Weighted Markups and
CPI for Selected Advanced Economies

Figure 1.2.3. Coef cient of Production Costs
Pass-Through to Prices

(Index, 2000 = 100)

(Percent)
1.2

Sales- eighted average mar u e cluding ?nancial
sector)
Consumer price index
2. Canada

140

140

130

130

120

120

110

110
100
2000

160
150

150

100
10

150 3. EA4

21 2000

10

4. United Kingdom

90
21

160
150

140

0.8
0.6
0.4
0.2
0.0

Bottom 20th–
40th–
20 ercent 40th
60th
re
D- mar u

60th– Top 20
80th
ercent
ercentile

140

130

130

120

120
110

110
100
2000

ass-through coef?cient

160 1. United States

ull ass-through

1.0

100
10

21 2000

10

90
21

ources: National statistical of?ces orldsco e and
staff calculations.
Note: ar u s ere com uted follo ing D e eigh and
Tambunlertchai (2018). The solid blue lines report the saleseighted average mar u
ith the red segment
re resenting the ears of the
Dandemic o
com ute the sales- eighted average ra values of
mar u s and net sales at the ?rm level are censored elo
the 5th percentile and above the 95th percentile of the
distribution for each country and year. The dashed green
lines re ort the consumer rice inde
rance
erman tal
ain

growth slowed, halted, or even turned slightly negative
in some countries. The figure also shows how consumer
price inflation, which had grown moderately in the
pre-pandemic period, accelerated during 2020–21.
While markup and consumer price growth have historically been positively correlated, growing steadily—
especially in services—the two have diverged markedly
over the past two years.
Despite the slowdown in the growth of markups
during COVID-19, the already-high markup levels
at the pandemic’s onset may have affected the link

ources: orldsco e and
staff calculations
Note: he ars re resent the coef?cients of ass-through
from costs of goods sold
er em lo ee to ?rms
mar u s during 20 2 for different quintiles of the
distri ution of re
D- mar u s he coef?cients are
com uted through a ?rm-level regression of the ercent
change in mar u s on the ercent change in
er
em lo ee in hich the
– er-em lo ee varia le is
interacted ith a categorical varia le for the quintiles of the
distri ution of re- andemic mar u s using the 20
average his interaction allo s the regression coef?cient to
var for each quintile of the distri ution he ass-through
coef?cient is then com uted as lus the regression
coef?cient for the res ective quintile

between rising production costs (due to supply chain
disruptions, commodity prices, and labor costs)
and consumer prices. On the one hand, thanks to
their market power, high-markup firms may have a
greater ability to pass higher costs on to consumers
through higher prices. On the other hand, high
initial markups also imply a greater capacity to
absorb cost increases without incurring losses (an
issue also potentially related to market power in
input markets).
The evidence suggests the latter mechanism was
more prominent during the pandemic, as firms with
higher pre-pandemic markups absorbed increasing costs to a larger extent than low-markup firms.
Figure 1.2.3 reports the estimated pass-through coefficients from a firm-level regression of percent changes

International Monetary Fund | October 2022

31

WORLD ECONOMIC OUTLOOK: COUNTERING THE COST?OF?LIVING CRISIS

Box 1.2 (continued)
in markups on percent changes in variable costs per
employee between 2019 and 2021 for US firms.
Firms in the top 20 percent of the pre–COVID-19
markup distribution passed 60 percent of their cost
increases through to prices, absorbing the remaining
40 percent through markup reductions. In contrast,

32

International Monetary Fund | October 2022

firms in the bottom 40 percent of the pre–COVID-19
distribution fully passed cost increases on to prices. A
similar result also emerges for other advanced economies. Overall, this finding supports the hypothesis
that markups are not a major driver of inflationary
pressures right now.

CHAPTER 1

GLOBAL PROSPECTS AND POLICIES

Box 1.3. Risk Assessment around the World Economic Outlook Baseline Projection
This box provides a quantitative assessment of the
risks around the World Economic Outlook’s (WEO’s) current baseline projection through confidence bands and a
downside scenario. Using the approach described in the
following section for deriving confidence bands, the risk
of global growth next year falling below 2 percent—a
low-growth outcome that has occurred only five other
times since 1970—is currently estimated to be about
25 percent. The downside scenario illustrates how a
plausible combination of shocks, coming from various
parts of the world economy and amplified by a large
tightening in global financial conditions, could push
global growth down to as low as 1 percent.

Confidence Bands
The IMF’s G20 model, presented in Andrle and
others (2015), is used here to quantify the uncertainty
around the baseline projection through confidence
bands, drawing on historical data as well as explicit
judgment about the likely recurrence of (variations of )
historical episodes.1 The approach should be thought
of as complementary to the growth-at-risk framework
presented in the Global Financial Stability Report,
which links the probability distribution of growth
projections to financial conditions.
Confidence bands around central projections are a
well-known device for conveying forecast uncertainty,
and they often reflect both statistical properties of
the data and expert judgment. The benefit of using a
structural, global model such as the G20 model for
this exercise is the ability to analyze many individual
countries jointly, consistently, and for multiple macroeconomic variables.
The model is first used to interpret the historical
cross-country data on output, inflation for some
countries, and oil prices and to estimate the implied
economic shocks—to aggregate demand and supply
and oil supply. The economic shocks that are estimated this way are correlated across countries and
through time, which helps address possible limitations
in the propagation mechanisms in the model. Drawing
all global and country-specific economic shocks for
a given year jointly captures periods in which shocks
are synchronized, such as 2020, and periods in which
there is greater variation across countries, such as
The authors of this box are by Michal Andrle, Jared Bebee,
Allan Dizioli, Rafael Portillo, and Aneta Radzikowski.
1An early version of the approach is described in Andrle and
Hunt (2020).

during the recovery from the global financial crisis.
The resulting distribution of macroeconomic variables
is shaped by the distribution of economic shocks, the
properties of the model, and the initial conditions for
the projection, including the effective lower bound on
monetary policy rates (which is less relevant for the
current outlook than it was in previous years).
Underlying the construction of the bands is the idea
that, while history does not repeat itself, it rhymes,
and so future shocks may partially resemble those in
the past. The historical parallels can also be introduced explicitly through expert judgment. If there is
a historical episode that shares some features with the
current period, then shocks from that episode could be
sampled more often when constructing the confidence
bands. If no judgment is imposed, then historical
shocks are sampled uniformly.
Figure 1.3.1 shows the distribution for global
growth that results from this approach, with and
without judgment, and under the assumption that
the current WEO baseline projection is the mode
of the distribution.2 Each shade of blue represents a
5 percentage point interval, and so the entire band
captures 90 percent of the distribution. Panel 1 shows
the distribution when shocks are sampled uniformly;
panel 2 shows the distribution when shocks from the
year 1982 are considered to be 10 times more likely
than those from other years. The year 1982 stands
out as relevant because it was a time when the world
economy was experiencing a slowdown in activity,
reflecting contractionary monetary policy in advanced
economies to address high inflation, most notably in
the US.3 But there are limits to the historical parallel:
while the current inflationary environment is reminiscent of the 1970s or early 1980s, the COVID shock is
unprecedented, and policy frameworks today are very
different. Nonetheless, drawing on events such as the
1982 episode can help illustrate the balance of risks to
the current outlook.

2Shocks to demand and supply and global oil shocks were estimated using the entire WEO sample starting in 1960; shocks to
demand were estimated for all G20 countries, whereas shocks to
supply were estimated only for the US. Future work will expand
the estimation to include supply shocks for all G20 countries,
which will allow for a richer assessment of uncertainty around
inflation projections.
3While there are other episodes in the 1970s and 1980s that
share similarities with the current period, 1982 stands out for its
impact on global growth

International Monetary Fund | October 2022

33

WORLD ECONOMIC OUTLOOK: COUNTERING THE COST?OF?LIVING CRISIS

Box 1.3 (continued)
Figure 1.3.1. Distribution of World GDP
Growth Forecast
(Percent)
WEO baseline projection
6

1. Forecast Uncertainty without Judgment

5
4
3
2
1
0
2021
6

22

23

24

25

2. Forecast Uncertainty with Judgment

5
4
3
2
1
0
2021

22

23

24

25

Source: IMF staff calculations.
Note: Each shade of blue represents a 5 percentage point
interval. Shocks are sampled uniformly in panel 1, while
shocks from 1982 are considered to be 10 times more likely
than in other years in panel 2. WEO = World Economic
Outlook.

Without judgment, very low-growth outcomes
are already somewhat likely because global growth is
unusually low under the baseline (the mode of the
distribution). With the judgment added, however, the
distribution skews further down, increasing the probability of historically low outcomes such as 2 percent or
even 1 percent global growth.

Downside Scenario
The G20 model is also used to quantify several
specific risks to the outlook. The shocks come from
various parts of the world economy, underscoring
the many sources of uncertainty currently prevailing.

34

International Monetary Fund | October 2022

Their joint effect would be amplified by a large tightening in global financial conditions. If the downside
scenario materializes, the level of global activity will
be 1.5 percentage points lower in 2023 and 1.6 percentage points lower in 2024, relative to the current baseline.
The downside scenario consists of the following layers:
• Higher oil prices. Oil prices are pushed up 30 percent, on average, for 2023 relative to the current
baseline because of a combination of (1) ongoing
efforts to reduce Russia’s oil export revenues and
(2) retaliation from Russia in the form of a 25 percent decrease in overall oil exports. Oil prices start
to decline in 2024 but stay 15 percent higher than
baseline. The shock fades in 2025 as global supply
and demand for oil adjust.
• China’s real estate sector. Issues in the real
estate sector lead to further decreases in real
estate investment over the next two years. The
level of total fixed investment falls by as much
as 9 percent by 2024, relative to the baseline projection.
• Lower potential output from persistent disruptions in labor markets. Labor markets show
clear signs of overheating, especially in several
advanced economies, despite activity remaining
below pre-COVID trends. Two labor market
developments help account for the disconnect:
lower labor force participation and shifts in the
Beveridge curve that point to worsened efficiency
in matching workers and jobs. In the downside
scenario, these two features are more persistent
than expected, leading to lower equilibrium
employment than in the baseline and higher
equilibrium unemployment. Underlying potential
output is lower as a result, implying less slack and
more inflation and requiring a larger monetary
policy response than currently envisaged. The
layer differentiates across countries depending on
how they fare in the two labor indicators relative
to pre-COVID levels: lower labor force participation is more important for some advanced
economies and emerging markets, while shifts in
the Beveridge curve are more visible in advanced
economies such as the US and some European
countries (data on vacancies is limited for most
emerging markets).

CHAPTER 1

GLOBAL PROSPECTS AND POLICIES

Box 1.3 (continued)
• Tighter global financial conditions. The combination of the first three shocks leads to a large
tightening in global financial conditions. Emerging
market currencies experience a sizable depreciation
with respect to the US dollar: 10 percent in emerging
markets outside Asia and 5 percent in Asian emerging markets, including China, on average in 2023.
Relatedly, emerging markets (this time excluding
China) see an average increase in sovereign premiums of more than 200 basis points in 2023 and an
additional increase in corporate premiums of about
80 basis points. Advanced economies experience an
increase in corporate premiums of about 100 basis
points and are also negatively affected by the large
depreciation of emerging market currencies.

Figure 1.3.2. Impact of Downside Scenario
on P and In?ation

The simulations assume monetary policy responds
endogenously to movements in inflation. Fiscal policy
responds through automatic stabilizers, but no additional fiscal measures are assumed.
Figure 1.3.2 (panels 1 and 2) presents the effects
from all four layers on the level of GDP and headline
inflation, respectively, for 2023 and 2024. Results
are presented as percent deviations from baseline and
grouped into three regions (advanced economies,
emerging markets excluding China, and China) and
the world. Each region-year is shown as a separate
bar, with the contribution from each shock shown in
stacked form.
As Figure 1.3.2 shows, each of these risks has
sizable negative effects on global activity, especially in
2023, with the magnitude of the effects across regions
depending on the shock.
• All three regions are affected by higher oil prices,
which reduce the level of global GDP by about
0.5 percentage point in 2023, relative to baseline.
The effect on the level of global output in 2024 is
smaller from this layer as the shock dissipates.
• Issues in China’s real estate sector reduce global
output by 0.3 percentage point in 2023. The effects
amplify over time as China’s investment continues
to decline relative to baseline in 2024.
• Advanced economies are especially affected by the
disruptions in labor markets, through both lower
potential and the tightening in monetary policy
required to bring down inflation. Emerging markets
excluding China are also affected, while the effect
on China is smaller and operating through international spillovers. Global output is lower by 0.3 percentage point from this layer in 2023; the effect

6 2. Impact on Headline In?ation
(Percentage point deviation from baseline)
5
China
Lower potential output
4
Financial conditions
Higher oil prices
3
Total
2
1
0
–1
–2
2023
2024
–3
AEs
China
AEs
China
EMs ex. CHN World
EMs ex. CHN World

3 1. Impact on GDP Level
(Percent deviation from baseline)
2
China
Lower potential output
Financial conditions
Higher oil prices
1
Total
0
–1
–2
–3
–4

2023

2024

AEs
China
EMs ex. CHN World

AEs
China
EMs ex. CHN World

7 3. Baseline Growth Projection, Con dence Bands
and Downside Scenario
6
WEO baseline projection
(Percent)
WEO downside scenario
5
4
3
2
1
0
2021

22

23

24

25

Source: IMF staff calculations.
Note: Each shade of blue in panel 3 represents a
5 percentage point interval. Shocks from 1982 are
considered to be 10 times more likely than those in other
years. AEs = advanced economies; EMs ex. CHN = emerging
markets excluding China; WEO = World Economic Outlook.

persists into 2024 and beyond, consistent with the
protracted effect on potential output.
• Tighter financial conditions take a large toll on
global activity (0.5 percentage point in 2023).
The effect amplifies over time as global investment

International Monetary Fund | October 2022

35

WORLD ECONOMIC OUTLOOK: COUNTERING THE COST?OF?LIVING CRISIS

Box 1.3 (continued)
gradually responds to the shock. The impact is most
notable in emerging markets, but spillovers to other
regions are large.
• The impact from the last three layers continues to
build over time, but there is no further deterioration in global activity in 2024 relative to baseline.
The decline in oil prices envisaged in the scenario
provides some offset, by reducing the impact of the
other layers on global purchasing power. As a result,
while the level of activity remains well below baseline, there is no impact on global growth in 2024.
While the effects on GDP are uniformly negative,
the effects on inflation vary depending on the shock
(see Figure 1.3.2, panel 2):
• Higher oil prices contribute 1.1–1.3 percentage
points to headline inflation across regions in 2023,
before turning disinflationary in 2024.

36

International Monetary Fund | October 2022

• The lower potential output layer is also inflationary.
The effects are concentrated in advanced economies, as well as emerging markets excluding China,
and are also quite persistent.
• Tighter financial conditions and the slowdown in
China are instead disinflationary.
• When all the layers are added together, global
inflation is about 1.3 percentage points higher
than baseline in 2023 and 1 percentage point
lower in 2024.
Figure 1.3.2 (panel 3) superposes the resulting
global growth in the downside scenario on the
confidence bands presented above (with judgment).
The downside scenario would imply global growth of
1.1 percent in 2023, which is in the 15th percentile of
the distribution.

SPECIAL FEATURE

MARKET DEVELOPMENTS AND FOOD PRICE INFLATION DRIVERS

Special Feature: Market Developments and Food Price Inflation Drivers
Commodity prices rose 19.1 percent between February
and August 2022. Energy—especially natural gas, up
129.2 percent—led the increase, as Russia cut gas supplies
to Europe. Base metal prices declined by 19.3 percent,
and precious metal prices fell by 6.0 percent, while those
of agricultural commodities fell by 5.4 percent. This special feature analyzes developments in food prices in detail.

Figure 1.SF.1. Commodity Market Developments
400 1. Commodity Price Indices with Forecast
(Index; 2016 = 100)
300

All commodities
Food

Energy
Base metals

200
100

Energy Prices Stay Elevated
Crude oil prices, up by 3.5 percent between February
and August 2022, surged to $120 a barrel in early March
following Russia’s invasion of Ukraine (Figure 1.SF.1,
panel 1). Prices reflected fears of oil export disruptions
at a time of tight supply-demand balances as well as a
muted response by the Organization of the Petroleum
Exporting Countries and other producers following prior
divestments in the fossil fuel sector (see the April 2022
World Economic Outlook [WEO]).
Strategic oil reserve releases by members of the
International Energy Agency and slower demand amid
COVID-19 lockdowns in China caused oil prices to
fall below $100 in April. However, announced bans
on Russian oil imports and expectations of broader
sanctions—including in the area of maritime insurance
and trade finance—coupled with outages elsewhere led
prices to surge to $120 in early June. Since then, rising
interest rates and recession fears have weighed on prices
as the International Energy Agency revised global 2022
oil demand growth down from 3.3 million barrels a
day (mb/d) to 2.0 mb/d in September. As European
and US firms reduced Russian oil purchases, Russian
oil was rerouted to China and India at a discount to
Brent (Figure 1.SF.1, panel 4). Refined-product prices
reached multiyear highs as European refineries adjusted
inputs and hit capacity constraints.
Futures markets suggest that oil prices will rise by
41.4 percent in 2022, to average $98.2 a barrel, but will
fall in the coming years, to $76.3 in 2025 (Figure 1.SF.1,
panel 2). Short- and medium-term risks to the oil futures
price outlook are roughly balanced (Figure 1.SF.1,
panel 3). Upside risks from additional supply disruptions
as a result of sanctions and war as well as higher demand
The contributors of this Special Feature are Christian Bogmans,
Andrea Pescatori (Team Lead) and Ervin Prifti, with support from
Yousef Nazer and research assistance from Rachel Brasier, Wenchuan
Dong, and Tianchu Qi.

0

2015

16

17

18

19

20

21

22

23
Q4

160 2. Brent Futures Curves1
(US dollars a barrel)
April 2021 WEO
April 2022 WEO

120

October 2021 WEO
October 2022 WEO

80

40

2020

21

22

23
Expiration date

24

25

26

240 3. Brent Price Medium-Term Prospects2
(US dollars a barrel, four-year futures)
Futures
68 percent con?dence interval
86 percent con?dence interval
95 percent con?dence interval

180
120
60
0

2017

18

19

20

5 4. Russian Oil Exports3
(Million barrels per day)
4

21

22

EUR
Other

23

CHN
N/A

24

25

IND

3
2
1
0

Jan Feb Mar Apr May Jun Jul Aug
Crude

Jan Feb Mar Apr May Jun Jul Aug
Re?ned

Sources: Bloomberg Finance L.P.; IMF Primary Commodity Price System; Kpler;
Re?nitiv Datastream; and IMF staff calculation.
Note: “N/A” WEO = World Economic Outlook.
1
WEO futures prices are baseline assumptions for each WEO report and are
derived from futures prices. October 2022 WEO prices are based on August 17,
2022, closing.
2
Derived from prices of futures options on August 17, 2022.
3
Kpler seaborn export as of September 19, 2022. “N/A” in legend means that oil is
exported to unknown destination.

International Monetary Fund | October 2022

37

WORLD ECONOMIC OUTLOOK: COUNTERING THE COST?OF?LIVING CRISIS

Figure 1.SF.2. Russian Gas Exports and Prices
(Million cubic meters a day; US dollars per million British thermal units)
Pipeline gas deliveries to EU
NE Asia LNG price (right scale)

Dutch TTF gas price (right scale)

450

100

400

90
80

350

70

300

60

250

50

200

40
30

150

20

100

10

50
Jan. Mar. May
2021 21
21

July
21

Sep. Nov. Jan. Mar. May
21
21
22
22
22

July
22

Sep.
22

0

Sources: Argus Media; European Network of Transmission System Operators for
as as ransmission stem erator of raine e?nitiv Datastream and
staff calculations.
Note: Last observation is September 16, 2022. EU = European Union; LNG =
lique?ed natural gas N
Northeast
itle ransfer acilit

owing to gas-to-oil switching are offsetting downside risks
from a slowing global economy, possible additional oil
supplies from Iran, and higher-than-expected oil production growth in the US. Sanctions and Russia’s potential
retaliation have raised uncertainty, and oil price projections may be subject to large revisions.
Supply concerns in Europe have been driving natural
gas prices. Russia reduced pipeline gas exports to Europe
by about 80 percent in September 2022 relative to the
previous year, citing maintenance problems or some
countries refusing to pay for gas in rubles. Dutch Title
Transfer Facility gas futures rose by 159 percent from
February to August 2022, to record highs (Figure 1.
SF.2). This has led European countries to increase reliance on global liquefied natural gas supplies (see Albrizio
and others 2022) and to discuss a price cap on Russian
gas. Prices are expected to stay high until the end of
2023. Coal prices rose 61.4 percent over the reference
period and remain historically high, reflecting gas-to-coal
switching, an embargo on Russian imports by EU and
Group of Seven countries, and production disruptions.

Metal Prices Retreat after Rallying
The base metal price index surged, on account of
Russia’s invasion of Ukraine, before retreating amid
slowing global economic growth to a net 19.3 percent
38

International Monetary Fund | October 2022

decline from February to August (Figure 1.SF.1,
panel 1). The price of aluminum is down by 25.0 percent, that of copper down by 19.6 percent, and that
of iron ore down by 21.9 percent. New COVID-19
lockdowns in China, supply chain issues, and monetary policy tightening in the US and elsewhere have
depressed both demand for metals and expectations
about future demand. The IMF’s energy transition
metal index covering metals critical for electric vehicles
and renewable energy fell 21.0 percent; precious
metals fared better, with the IMF index slipping just
6.0 percent.
Base metal prices are expected to fall 5.5 percent,
on average, in 2022, compared with a 9.9 percent
increase projected in the April WEO, and to decrease
by a further 12.0 percent in 2023. Precious metal
prices are expected to decline more moderately, by
0.9 percent in 2022 and an additional 0.6 percent in
2023. Risks to this outlook are balanced as investors weigh potential supply reductions by European
smelters amid higher energy costs against weakening
global demand.

Agricultural Prices Correct from Peak Following Russia’s
Invasion of Ukraine
Food commodity prices surged after Russia’s
invasion of Ukraine but corrected to prewar levels in
June and July, halting a two-year rally (see following
sections). Improved supply conditions and a gradual
end to Russia’s blockade of Ukrainian grain exports
drove the decline, along with macroeconomic factors—
including rising interest rates and global recession
concerns. Looking ahead, risks of renewed export
restrictions (such as Indonesia’s April 2022 ban on
palm oil exports), droughts in part of China and the
US, and pass-through from higher fertilizer prices––
which reflect the reduced availability of fertilizers
produced in Belarus and Russia––tilt the balance of
risks to the upside.

Drivers of Global Food Prices and Transmission to Food
Price Inflation
Global food commodity prices entered an expansionary phase in 2020, increasing by 54 percent, from
trough to peak, with the prices of foods that make
up large parts of diets increasing by 107 percent
(Figure 1.SF.3). Although food prices are not new to
cyclical fluctuations, this price rally stands out historically (Table 1.SF.1).

SPECIAL FEATURE

MARKET DEVELOPMENTS AND FOOD PRICE INFLATION DRIVERS

Table 1.SF.1. Oil, Cereal, and Food Price Boom Phases

Figure 1.SF.3. Selected Commodity Price Indices
(Percent)

Oil
3.0 1. Oil Price Index (log)
Cereal
2.5

Food

2.0

75

80

85

90

95

2000

05

10

15

Sharpness
12.9%
5.8%
3.3%
2.4%
2.3%
2.1%

together, these cereals account for two-thirds of global
food production.

2.5

Factors behind Food Price Movements

2.0
1.5

75

80

85

90

95

2000

05

10

15

2022

90

95

2000

05

10

15

2022

3.0 3. Food Price Index (log)
2.5
2.0
1.5
1.0
1970

Amplitude
322%
165%
107%
78%
54%
45%

2022

3.0 2. Cereal Price Index (log)

1.0
1970

Duration
25
29
32
32
24
22

Sources: Haver Analytics; IMF, Primary Commodity Price System; World Bank; and IMF
staff calculations.
Note: Boom phases are identified using the Harding and Pagan (2002) algorithm.
Duration is in months. Sharpness is amplitude divided by duration per cycle.

1.5
1.0
1970

Latest
Average
Latest
Average
Latest
Average

75

80

85

Sources: Haver Analytics; IMF, Consumer Price Index and Primary Commodity
Price Series databases; World Bank; and IMF staff calculations.
Note: Shaded areas indicate periods of expansion. All series are de?ated by the US
consumer price index. Last observation is June 2022.

The price surge has contributed to domestic inflation, making monetary policy more difficult, especially
in low-income countries, where food accounts for
half of total consumption, and has raised concerns
about food security and social unrest (Bellemare 2015;
Bogmans, Pescatori, and Prifti 2021; FAO and others,
2021). Moreover, food-importing countries have seen
deteriorations in their balance of payments and fiscal
balances, which typically occur when social protection
increases in response to higher food prices (Ng and
Aksoy 2008). The following sections examine trends
in cereal prices and their drivers, providing evidence
on the pass-through from international food prices
to domestic food price inflation. The analysis focuses
on cereals (wheat, corn, rice, and a few smaller crops)
that are common in diets and hard to substitute;

Food and energy prices have often moved in tandem, magnifying their macroeconomic effects. Food
and oil prices have been in the same phase (boom or
bust) about 66 percent of the time since 1970; this
concordance increases to 75 percent for the period
since 2004. There are at least three reasons behind the
comovement: (1) oil is used directly as fuel for farm
equipment and transportation, and gas affects farming indirectly, being the main input of nitrogen-based
fertilizers and pesticides; (2) global economic activity
is a common demand factor (even though it is more
relevant for energy); and (3) some agricultural products
are used as biofuels.
After the introduction of biofuel mandates in
the European Union and US in the mid-2000s, the
correlation between oil and cereal prices increased
strongly (Table 1.SF.2). This was particularly true for
corn, which was favored in biofuel policies relative to
other cereals. The correlation also rose for vegetable oil.
The higher correlation is not confined to commodities
used as biofuels, in part because of price spillovers.
A more prominent role of common shocks and the
increased financialization of commodity markets in the
mid-2000s may have also contributed. Finally, the US
dollar value and interest rates are also common factors
driving food commodity prices (Gilbert 2010; Baffes
and Haniotis 2016).
Table 1.SF.2. Oil-Cereal Price Correlation
Cereal
Corn
Vegetable oil

1970–2004
–0.9%
–2.3%
–4.6%

2005–June 2022
17.4%
23.1%
44.5%

Sources: World Bank; and IMF staff calculations.
Note: Five-year rolling correlations of monthly log differences of oil prices
with cereal, corn, and vegetable oil prices. All prices are deflated by the US
consumer price index.

International Monetary Fund | October 2022

39

WORLD ECONOMIC OUTLOOK: COUNTERING THE COST?OF?LIVING CRISIS

Figure 1.SF.4. Response of Cereal Prices to Major Drivers

Figure 1.SF.5. Response of Food CPI to International Food
Price Shock

(Cumulative percent)

(Percent)
20 1. Fertilizer Price Shock

20

2. Oil Price Shock

Average pass-through, all countries
Low-income countries
High-trade-openness countries
Low-trade-openness countries
High-income countries

0.4
10

10

0

0
–10

–10
–20
0

0.3

1

2

3

4

5

0

40 3. Three-Month Treasury
Bill Shock

1

2

3

4

4. Harvest Shock

5

–20

0.2

40

0.1

20

20

0

0

–20

–20

–40
0

–40
5

1

2

3

4

5

0

1

2

3

4

Sources: Haver Analytics; IMF, Consumer Price Index and Primary Commodity
Price Series; World Bank; and IMF staff calculations.
Note: Quarters on the x-axis. Panels show cumulative impulse response of cereal
prices to (panel 1) 10 percent fertilizer price shock; (panel 2) 10 percent oil price
shock; (panel 3) 100 basis point shock to three-month Treasury bills; and (panel 4)
one-standard-deviation harvest shock. Shaded areas are 90 percent con?dence
intervals. See Online Annex 1.SF.1 for data descriptions and methodology.

Econometric Analysis
Four drivers of cereal prices are studied here in detail:
shocks to fertilizer and oil prices, cereal production, and
US interest rates. Control variables include global GDP
growth and the US dollar real effective exchange rate
(see Online Annex 1.SF.1 for technical details).
Supply shocks dominate fluctuations in cereal prices.
A typical (negative) global harvest shock induces a
16 percent rise in prices in the same quarter, with
the increase peaking at 23 percent after one quarter
(Figure 1.SF.4). Energy prices have a smaller effect
especially those related to oil, acting with lags. A negative oil supply shock that raises oil prices by 10 percent leads cereal prices to rise by about 2 percent after
three to four quarters (suggesting a modest effect from
biofuels, since the cost share of oil in cereal production
varies from about 10 to 15 percent). Prices of fertilizers, in contrast, have a delayed but important effect. A
10 percent rise in fertilizer prices (due to a natural gas
supply shock) has no immediate effects but leads to a
7 percent rise in cereal prices after one quarter. Though
persistent, the effect becomes less precisely estimated
at longer horizons. Finally, a 100-basis point US
40

International Monetary Fund | October 2022

0.0
0

1

2

3

4

5

6
7
Months

8

9

10

11

12

Sources: Haver Analytics; World Bank; and IMF staff calculations.
Note: Response of domestic food consumer price index (CPI) to a 1 percentage
point shock to international food prices. Shaded areas are 90 percent con?dence
bands.

monetary policy shock reduces cereal prices by about
13 percent with a one-quarter lag.
Domestic Food Price Inflation Rising Following Higher
Global Food Prices
Taxes, subsidies, price controls, weak market integration, and local distribution costs often limit the
transmission of international (producer) food price
variations across borders to domestic retail food prices
(Figure 1.SF.5). In fact, even though the recent rise in
domestic food price inflation is broad-based, variation
across regions is substantial, with recent inflation levels
as low as 5.3 percent in south and east Asia and as
high as 12.6 percent in central Asia and Europe.
It is therefore relevant to know the following:
(1) What is the timing and the magnitude of the
pass-through from international to domestic food
prices? and (2) Do certain country characteristics, such
as income level and trade openness, make countries
more susceptible to such pass-through?
Pass-Through from Global Food Prices to Domestic Food
Price Inflation
Panel data and local-projections methods are used
here to trace the impact of food commodity prices
(instrumented by harvest shocks) on domestic food price
inflation. Several control variables are included, such as
oil prices (to proxy for road transportation costs), the
Baltic Dry Index (to proxy for shipping costs), headline

SPECIAL FEATURE

consumer price inflation (to capture monetary factors),
and exchange rates (in local currency units per dollar).
After an international food price shock, consumer
food price inflation rises linearly and peaks after
10 months, then starts declining but persists at a
higher level. In total, food consumer price inflation
increases about 0.3 percentage point in response to
a 1 percentage point change in international food
prices after about 10–12 months (Figure 1.SF.5). The
pass-through, which is limited by the cost share of
food commodities in food consumer prices, is about
30 percent for the average country.
Some Countries Are More Vulnerable to Global Food
Price Shocks
The pass-through is larger for emerging market
economies than for advanced economies, in part
because food commodities have a higher cost share in
the former group. It is also larger for countries that
score higher on trade openness, as greater cross-border
arbitrage opportunities raise domestic prices’ responsiveness to global food price shocks. This greater
responsiveness holds for both net food importers and
net food exporters and can explain why food exporters are tempted to introduce food export restrictions
when commodity prices rise (Laborde Debucquet and
Mamun 2022). For a one-standard-deviation rise in
GDP per capita, the pass-through declines by 6 percentage points, while it increases by 7 percentage points for
a one-standard-deviation rise in trade openness above
the global mean (Figure 1.SF.5). High degrees of trade
openness can thus explain the relatively high levels of
average food price inflation in central Asia compared
with those in countries in south and east Asia.

Conclusions and Outlook for Food Prices
International food prices are estimated to have
added 5 percentage points to food price inflation for
the average country in 2021 and are forecast to add an
estimated 6 percentage points in 2022 and 2 percentage points in 2023 (Figure 1.SF.6). A combination of
supply-side factors (the 2020–22 La Niña episode and
food trade restrictions), cereal-specific demand (China’s
2021 restocking), low interest rates, and more recently,
the war in Ukraine and the Russian blockade of wheat
exports from Ukraine created a perfect storm for
global food commodity markets that kept prices on an
upward trajectory between April 2020 and May 2022.
The outlook for domestic food price inflation
remains uncertain, as global food prices could surprise

MARKET DEVELOPMENTS AND FOOD PRICE INFLATION DRIVERS

Figure 1.SF.6. Conditional Forecast Domestic Food Price
In?ation
(Percent)
Aug. 2022

May 22

Jan. 22

May 21

Feb. 21

7
6
5
4
3
2
1
0
–1
–2
2020

21

22

23

24

Sources: Bloomberg L.P.; and IMF staff estimates.
Note: Pro ected domestic food in?ation based on recent commodity price forecasts
on various dates.

again on the upside, given the high uncertainty about
the impact of the war in Ukraine and weather events
and the delayed effect of high fertilizer prices. Current
estimates already suggest a negative shock for global
cereal production equivalent to about a 0.6 standard
deviation in cereal growth for 2022 (OECD-FAO,
2022)—contributing to a 23 percent rise in cereal prices
this year and outweighing the effects of higher interest
rates on food price inflation. Finally, differences in the
timing and magnitude of the price pass-through make
low-income and high-food-openness countries more
susceptible to a resumption of the global food price rally.
Recent events underscore the importance of
well-functioning international food markets and of
appropriate (domestic) policies to address inevitable
price swings, including targeted food aid to vulnerable consumers as well as incentives for the buildup
of global food stocks over the medium term. Open
food trade raises consumer variety, promotes deeper
and more stable markets, and constitutes a hedge
against the volatility of domestic production. Policies that promote self-sufficiency weaken the world
food trading system and raise environmental costs
through land conversion or more intensive farming
practices. Especially for small countries (because of
within-country spatial correlation of weather patterns),
densely populated countries, and countries particularly
vulnerable to climate change, international trade will
remain indispensable.
International Monetary Fund | October 2022

41

WORLD ECONOMIC OUTLOOK: COUNTERING THE COST?OF?LIVING CRISIS

Annex Table 1.1.1. European Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment
(Annual percent change, unless noted otherwise)
Real GDP
Projections
2021
2022
2023
5.9
2.1
0.6

Europe
Advanced Europe
Euro Area4,5
Germany
France
Italy
Spain
The Netherlands

Consumer Prices1
Projections
2021
2022
2023
4.9
15.3
10.9

Current Account Balance2
Projections
2021
2022
2023
3.0
1.6
1.7

Unemployment3
Projections
2021
2022
2023


5.5
5.2
2.6
6.8
6.6
5.1
4.9

3.1
3.1
1.5
2.5
3.2
4.3
4.5

0.5
0.5
–0.3
0.7
–0.2
1.2
0.8

2.6
2.6
3.2
2.1
1.9
3.1
2.8

8.4
8.3
8.5
5.8
8.7
8.8
12.0

6.2
5.7
7.2
4.6
5.2
4.9
8.0

3.3
2.5
7.4
0.4
2.4
0.9
9.0

1.3
1.0
4.2
–1.3
–0.2
–0.2
7.5

1.4
1.4
5.3
–1.5
0.3
–0.2
7.7

6.9
7.7
3.6
7.9
9.5
14.8
4.2

6.1
6.8
2.9
7.5
8.8
12.7
3.5

6.4
7.0
3.4
7.6
9.4
12.3
3.9

6.2
13.6
4.6
4.9
8.3

2.4
9.0
4.7
6.2
5.2

0.4
4.0
1.0
0.7
1.8

3.2
2.4
2.8
0.9
0.6

9.5
8.4
7.7
7.9
9.2

4.9
6.5
5.1
4.7
3.2

–0.4
14.2
–0.5
–1.2
–6.5

–2.2
12.2
–2.6
–1.1
–6.7

–0.9
9.8
–2.1
–0.4
–6.3

6.3
6.3
6.2
6.6
15.0

5.4
4.7
4.5
6.1
12.6

5.6
4.8
4.6
6.5
12.2

3.0
3.0
5.0
8.2
6.9

2.1
1.8
1.8
5.7
1.6

0.5
1.5
1.1
1.7
1.1

2.1
2.8
4.6
1.9
3.5

6.5
11.9
17.6
8.9
8.4

3.5
10.1
8.4
5.1
3.7

0.9
–2.0
1.4
3.8
4.8

–0.8
–3.7
–1.6
–0.1
4.3

–0.2
–2.9
–2.1
0.4
4.4

7.6
6.8
7.1
4.8
5.7

7.0
6.2
7.3
4.3
5.0

7.4
6.2
7.0
4.3
5.0

4.5
8.0
5.6
10.3

2.5
1.0
3.5
6.2

1.6
1.8
2.5
3.3

3.2
4.5
2.2
0.7

16.5
21.0
8.0
5.9

8.0
9.5
3.8
4.6

–2.9
–1.6
–7.2
–4.9

–3.3
–0.2
–8.5
–3.1

–3.0
0.1
–7.2
–2.2

7.6
6.2
7.5
3.5

7.4
6.6
6.7
3.2

7.2
6.8
6.5
3.3

United Kingdom6
Switzerland
Sweden
Czech Republic
Norway

7.4
4.2
5.1
3.5
3.9

3.6
2.2
2.6
1.9
3.6

0.3
0.8
–0.1
1.5
2.6

2.6
0.6
2.7
3.8
3.5

9.1
3.1
7.2
16.3
4.7

9.0
2.4
8.4
8.6
3.8

–2.6
9.4
5.4
–0.9
15.0

–4.8
6.2
3.8
–4.3
19.4

–4.5
6.4
3.5
–2.2
14.5

4.5
3.0
8.8
2.8
4.4

3.8
2.2
7.6
2.5
3.9

4.8
2.4
7.4
2.3
3.8

Denmark
Iceland
Andorra
San Marino

4.9
4.4
8.9
5.4

2.6
5.1
6.6
3.1

0.6
2.9
2.0
0.8

1.9
4.5
1.7
2.1

7.2
8.4
5.3
6.9

3.8
6.7
2.8
4.5

8.8
–1.6
15.9
4.0

8.2
–2.0
16.7
1.4

7.4
–0.3
17.3
0.8

5.1
6.0
2.9
6.1

5.2
4.0
2.0
5.9

5.3
4.0
1.8
5.7

Emerging and Developing Europe7
Russia
Türkiye
Poland
Romania
Ukraine6

6.8
4.7
11.4
5.9
5.9
3.4

0.0
–3.4
5.0
3.8
4.8
–35.0

0.6
–2.3
3.0
0.5
3.1

9.5
6.7
19.6
5.1
5.0
9.4

27.8
13.8
73.1
13.8
13.3
20.6

19.4
5.0
51.2
14.3
11.0

1.7
6.9
–1.7
–0.7
–7.0
–1.6

2.9
12.2
–5.7
–4.0
–8.4

2.8
11.1
–3.9
–3.3
–8.0


4.8
12.0
3.4
5.6
9.8


4.0
10.8
2.8
5.5


4.3
10.5
3.2
5.5

Hungary
Belarus
Bulgaria5
Serbia
Croatia

7.1
2.3
4.2
7.4
10.2

5.7
–7.0
3.9
3.5
5.9

1.8
0.2
3.0
2.7
3.5

5.1
9.5
2.8
4.1
2.6

13.9
16.5
12.4
11.5
9.8

13.3
13.1
5.2
8.3
5.5

–3.2
2.7
–0.4
–4.4
3.4

–6.7
–1.5
–0.9
–8.4
2.2

–3.0
–1.1
–1.4
–7.0
2.0

4.1
3.9
5.3
10.1
8.1

3.4
4.5
5.1
9.9
6.9

3.8
4.3
4.7
9.7
6.6

Belgium
Ireland
Austria
Portugal
Greece
Finland
Slovak Republic
Lithuania
Slovenia
Luxembourg
Latvia
Estonia
Cyprus
Malta

Source: IMF staff estimates.
Note: Data for some countries are based on fiscal years. Please refer to Table F in the Statistical Appendix for a list of economies with exceptional reporting periods.
1Movements in consumer prices are shown as annual averages. Year-end to year-end changes can be found in Tables A6 and A7 in the Statistical Appendix.
2Percent of GDP.
3Percent. National definitions of unemployment may differ.
4Current account position corrected for reporting discrepancies in intra-area transactions.
5Based on Eurostat’s harmonized index of consumer prices, except in the case of Slovenia.
6See country-specific notes for Ukraine and the United Kingdom in the “Country Notes” section of the Statistical Appendix.
7Includes Albania, Bosnia and Herzegovina, Kosovo, Moldova, Montenegro, and North Macedonia.

42

International Monetary Fund | October 2022

CHAPTER 1

GLOBAL PROSPECTS AND POLICIES

Annex Table 1.1.2. Asian and Pacific Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment
(Annual percent change, unless noted otherwise)

Asia
Advanced Asia
Japan
Korea
Taiwan Province of China
Australia
Singapore

Real GDP
Projections
2021
2022
2023
6.5
4.0
4.3

Consumer Prices1
Projections
2021
2022 2023
2.0
4.0
3.4

Current Account Balance2
Projections
2021
2022
2023
2.2
1.4
1.3

Unemployment3
Projections
2021 2022 2023


3.7
1.7
4.1
6.6
4.9
7.6

2.2
1.7
2.6
3.3
3.8
3.0

2.3
1.6
2.0
2.8
1.9
2.3

1.2
–0.2
2.5
2.0
2.8
2.3

3.6
2.0
5.5
3.1
6.5
5.5

2.6
1.4
3.8
2.2
4.8
3.0

4.9
2.9
4.9
14.8
3.1
18.1

3.5
1.4
3.2
14.8
2.1
12.8

3.5
2.2
3.5
12.7
0.7
12.5

3.4
2.8
3.7
4.0
5.1
2.7

2.9
2.6
3.0
3.6
3.6
2.1

2.9
2.4
3.4
3.6
3.7
2.1

6.3
5.6
18.0

–0.8
2.3
–22.4

3.9
1.9
56.7

1.6
3.9
0.0

1.9
6.3
2.5

2.4
3.9
2.4

11.3
–6.0
13.8

8.6
–7.7
–2.4

5.9
–6.0
22.8

5.2
3.8
3.0

4.5
3.4
3.0

4.0
3.9
2.7

7.2
8.1
8.7

4.4
3.2
6.8

4.9
4.4
6.1

2.2
0.9
5.5

4.1
2.2
6.9

3.6
2.2
5.1

1.0
1.8
–1.2

0.7
1.6
–3.5

0.6
1.3
–2.9


4.0


4.2


4.1

ASEAN-5
Indonesia
Thailand
Vietnam
Philippines
Malaysia

3.4
3.7
1.5
2.6
5.7
3.1

5.3
5.3
2.8
7.0
6.5
5.4

4.9
5.0
3.7
6.2
5.0
4.4

1.9
1.6
1.2
1.8
3.9
2.5

4.7
4.6
6.3
3.8
5.3
3.2

4.4
5.5
2.8
3.9
4.3
2.8

–0.3
0.3
–2.2
–2.0
–1.8
3.8

0.5
2.2
–0.5
0.3
–4.4
1.6

0.8
1.1
1.9
1.0
–3.3
2.2


6.5
1.5
2.7
7.8
4.7


5.5
1.0
2.4
5.7
4.5


5.3
1.0
2.3
5.4
4.3

Other Emerging and Developing Asia5

3.0

3.7

4.4

5.1

12.4

11.4

–2.9

–4.4

–3.4

7.4

4.4

4.9

2.1

3.7

3.3

1.1

0.8

0.7

Hong Kong SAR
New Zealand
Macao SAR
Emerging and Developing Asia
China
India4

Memorandum
Emerging Asia6

Source: IMF staff estimates.
Note: Data for some countries are based on fiscal years. Please refer to Table F in the Statistical Appendix for a list of economies with exceptional reporting periods.
1Movements in consumer prices are shown as annual averages. Year-end to year-end changes can be found in Tables A6 and A7 in the Statistical Appendix.
2Percent of GDP.
3Percent. National definitions of unemployment may differ.
4See the country-specific note for India in the “Country Notes” section of the Statistical Appendix.
5Other Emerging and Developing Asia comprises Bangladesh, Bhutan, Brunei Darussalam, Cambodia, Fiji, Kiribati, Lao P.D.R., Maldives, Marshall Islands, Micronesia,
Mongolia, Myanmar, Nauru, Nepal, Palau, Papua New Guinea, Samoa, Solomon Islands, Sri Lanka, Timor-Leste, Tonga, Tuvalu, and Vanuatu.
6Emerging Asia comprises the ASEAN-5 economies, China, and India.

International Monetary Fund | October 2022

43

WORLD ECONOMIC OUTLOOK: COUNTERING THE COST?OF?LIVING CRISIS

Annex Table 1.1.3. Western Hemisphere Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment
(Annual percent change, unless noted otherwise)
Real GDP
Projections
2022
2023
1.8
1.0
1.6
1.0
2.1
1.2
3.3
1.5
4.8
0.4

Consumer Prices1
Projections
2021
2022
2023
4.7
7.9
3.8
4.7
8.1
3.5
5.7
8.0
6.3
3.4
6.9
4.2
2.4
4.4
3.5

Current Account Balance2
Projections
2021
2022
2023
–3.2
–3.5
–2.8
–3.7
–3.9
–3.1
–0.4
–1.2
–1.2
0.0
0.5
–0.2


Unemployment3
Projections
2021 2022 2023



5.4
3.7
4.6
4.1
3.4
3.7
7.4
5.3
5.9
7.9
6.0
7.9

North America
United States
Mexico
Canada
Puerto Rico4

2021
5.5
5.7
4.8
4.5
2.7

South America5
Brazil
Argentina
Colombia
Chile
Peru

7.3
4.6
10.4
10.7
11.7
13.6

3.6
2.8
4.0
7.6
2.0
2.7

1.6
1.0
2.0
2.2
–1.0
2.6

12.1
8.3
48.4
3.5
4.5
4.0

17.4
9.4
72.4
9.7
11.6
7.5

14.3
4.7
76.1
7.1
8.7
4.4

–2.0
–1.7
1.4
–5.7
–6.7
–2.5

–1.9
–1.5
–0.3
–5.1
–6.7
–3.0

–1.5
–1.6
0.6
–4.4
–4.4
–2.1


13.2
8.7
13.8
8.9
10.9


9.8
6.9
11.3
7.9
7.6


9.5
6.9
11.1
8.3
7.5

4.2
0.5
6.1
4.2
4.4

2.9
6.0
3.8
0.2
5.3

2.7
6.5
3.2
4.3
3.6

0.1
1,588.5
0.7
4.8
7.7

3.2
210.0
3.2
9.5
9.1

2.4
195.0
3.6
4.5
7.8

2.9
–2.1
2.0
0.8
–1.8

2.4
4.0
–1.4
–3.8
–1.2

2.1
6.0
–2.1
–0.1
–1.9

4.2

7.0
7.7
9.4

4.0

4.5
7.2
7.9

3.8

4.0
6.4
7.9

Ecuador
Venezuela
Bolivia
Paraguay
Uruguay
Central America6

11.0

4.7

3.6

4.5

7.4

5.4

–1.9

–3.2

–2.5

Caribbean7

5.1

12.4

7.3

8.4

12.3

9.6

–3.5

4.8

4.2

Memorandum
Latin America and the Caribbean8
Eastern Caribbean Currency Union9

6.9
5.2

3.5
7.2

1.7
5.4

9.8
1.6

14.1
5.9

11.4
3.6

–1.6
–16.9

–1.7
–16.7

–1.4
–13.2




Source: IMF staff estimates.
Note: Data for some countries are based on fiscal years. Please refer to Table F in the Statistical Appendix for a list of economies with exceptional reporting periods.
1Movements in consumer prices are shown as annual averages. Year-end to year-end changes can be found in Tables A6 and A7 in the Statistical Appendix. Aggregates exclude
Venezuela.
2Percent of GDP.
3Percent. National definitions of unemployment may differ.
4Puerto Rico is a territory of the United States, but its statistical data are maintained on a separate and independent basis.
5See the country-specific notes for Argentina and Venezuela in the “Country Notes” section of the Statistical Appendix.
6Central America refers to CAPDR (Central America, Panama, Dominican Republic) and comprises Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, and Panama.
7The Caribbean comprises Antigua and Barbuda, Aruba, The Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Haiti, Jamaica, St. Kitts and Nevis, St. Lucia, St. Vincent
and the Grenadines, Suriname, and Trinidad and Tobago.
8Latin America and the Caribbean comprises Mexico and economies from the Caribbean, Central America, and South America. See the country-specific notes for Argentina and
Venezuela in the “Country Notes” section of the Statistical Appendix.
9Eastern Caribbean Currency Union comprises Antigua and Barbuda, Dominica, Grenada, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines as well as Anguilla
and Montserrat, which are not IMF members.

44

International Monetary Fund | October 2022

CHAPTER 1

GLOBAL PROSPECTS AND POLICIES

Annex Table 1.1.4. Middle East and Central Asia Economies: Real GDP, Consumer Prices, Current Account Balance, and
Unemployment
(Annual percent change, unless noted otherwise)

Middle East and Central Asia

Real GDP
Projections
2021
2022
2023
4.5
5.0
3.6

Consumer Prices1
Projections
2021
2022
2023
12.9
13.8
13.1

Current Account Balance2
Projections
2021
2022
2023
2.3
6.5
5.2

Unemployment3
Projections
2021 2022 2023


Oil Exporters4
Saudi Arabia
Iran
United Arab Emirates
Kazakhstan
Algeria

4.5
3.2
4.7
3.8
4.1
3.5

4.9
7.6
3.0
5.1
2.5
4.7

3.5
3.7
2.0
4.2
4.4
2.6

11.3
3.1
40.1
0.2
8.0
7.2

12.8
2.7
40.0
5.2
14.0
9.7

11.4
2.2
40.0
3.6
11.3
8.7

4.2
5.3
0.7
11.4
–2.9
–2.8

9.5
16.0
1.6
14.7
3.0
6.2

7.7
12.3
1.5
12.5
1.8
0.6


6.7
9.2

4.9



9.4

4.9



9.6

4.8

Iraq
Qatar
Kuwait
Azerbaijan
Oman
Turkmenistan

7.7
1.6
1.3
5.6
3.0
4.6

9.3
3.4
8.7
3.7
4.4
1.2

4.0
2.4
2.6
2.5
4.1
2.3

6.0
2.3
3.4
6.7
1.5
15.0

6.5
4.5
4.3
12.2
3.1
17.5

4.5
3.3
2.4
10.8
1.9
10.5

7.8
14.7
16.3
15.2
–6.1
0.6

16.3
21.2
29.1
31.7
6.2
2.5

13.0
22.1
23.0
31.4
3.6
2.5



1.3
6.0




5.9




5.8

Oil Importers5,6
Egypt
Pakistan7
Morocco
Uzbekistan
Sudan

4.6
3.3
5.7
7.9
7.4
0.5

5.1
6.6
6.0
0.8
5.2
–0.3

3.7
4.4
3.5
3.1
4.7
2.6

15.5
4.5
8.9
1.4
10.8
359.1

15.2
8.5
12.1
6.2
11.2
154.9

15.7
12.0
19.9
4.1
10.8
76.9

–3.9
–4.4
–0.8
–2.3
–7.0
–7.4

–4.8
–3.6
–4.6
–4.3
–3.3
–6.4

–4.2
–3.4
–2.5
–4.1
–4.2
–7.5


7.3
6.3
11.9
9.5
28.3


7.3
6.2
11.1
10.0
30.6


7.3
6.4
10.7
9.5
30.6

3.3
2.2
10.4
5.7
9.2

2.2
2.4
9.0
7.0
5.5

1.6
2.7
4.0
3.5
4.0

5.7
1.3
9.6
7.2
9.0

8.1
3.8
11.6
8.5
8.3

8.5
3.0
6.0
7.0
8.1

–6.1
–8.8
–10.1
–3.7
8.4

–9.1
–6.7
–7.2
–5.5
3.8

–8.0
–4.8
–6.8
–5.1
0.0

16.2
24.4
20.6
15.3



18.7
15.2



19.5
15.1

3.7
7.1
2.4

3.8
4.0
4.0

3.2
3.5
4.8

11.9
1.2
3.8

13.5
4.9
7.1

12.4
3.4
7.8

–8.7
–8.2
–9.4

–12.5
–10.7
–11.6

–9.6
–8.9
–9.1

9.0
26.4

9.0
25.7

9.0
25.0

5.6
4.3

3.8
5.1

4.0
3.6

9.2
13.4

12.9
13.9

10.5
13.4

–1.0
2.6

4.8
6.6

3.8
5.3




4.1
8.6
7.8
2.7

5.0
6.1
0.9
5.9

3.6
3.0
4.4
4.2

14.2
1.5
4.7
8.3

14.2
4.5
8.0
11.6

12.4
3.6
6.8
12.1

2.9
4.2
–1.1
–5.4

7.4
2.5
1.6
–4.5

5.9
3.7
0.2
–4.2


5.0


3.9


3.8

Tunisia
Jordan
Georgia
Armenia
Tajikistan
Kyrgyz Republic
West Bank and Gaza
Mauritania
Memorandum
Caucasus and Central Asia
Middle East, North Africa, Afghanistan,
and Pakistan6
Middle East and North Africa
Israel8
Maghreb9
Mashreq10

Source: IMF staff estimates.
Note: Data for some countries are based on fiscal years. Please refer to Table F in the Statistical Appendix for a list of economies with exceptional reporting periods.
1Movements in consumer prices are shown as annual averages. Year-end to year-end changes can be found in Tables A6 and A7 in the Statistical Appendix.
2Percent of GDP.
3Percent. National definitions of unemployment may differ.
4Includes Bahrain, Libya, and Yemen.
5Includes Djibouti, Lebanon, and Somalia. See the country-specific note for Lebanon in the “Country Notes” section of the Statistical Appendix.
6Excludes Afghanistan and Syria because of the uncertain political situation. See the country-specific notes in the “Country Notes” section of the Statistical Appendix.
7See the country-specific note for Pakistan in the “Country Notes” section of the Statistical Appendix.
8Israel, which is not a member of the economic region, is shown for reasons of geography but is not included in the regional aggregates.
9The Maghreb comprises Algeria, Libya, Mauritania, Morocco, and Tunisia.
10The Mashreq comprises Egypt, Jordan, Lebanon, and West Bank and Gaza. Syria is excluded because of the uncertain political situation.

International Monetary Fund | October 2022

45

WORLD ECONOMIC OUTLOOK: COUNTERING THE COST?OF?LIVING CRISIS

Annex Table 1.1.5. Sub-Saharan African Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment
(Annual percent change, unless noted otherwise)
Real GDP
Projections
2021
2022
2023
4.7
3.6
3.7

Consumer Prices1
Projections
2021
2022
2023
11.1
14.4
11.9

2.9
3.6
0.8
1.5
–1.1
–3.2

3.2
3.2
2.9
2.7
3.3
5.8

3.0
3.0
3.4
3.7
3.4
–3.1

17.0
17.0
25.8
1.1
–0.8
–0.1

18.2
18.9
21.7
3.5
4.9
5.1

15.5
17.3
11.8
3.2
3.1
5.7

1.0
–0.4
11.2
–5.7
–4.5
–3.4

2.3
–0.2
11.3
–1.4
0.8
–1.6

0.5
–0.6
5.4
–2.9
–2.4
–2.1
















Middle-Income Countries5
South Africa
Ghana
Côte d’Ivoire
Cameroon
Zambia
Senegal

5.3
4.9
5.4
7.0
3.6
4.6
6.1

3.1
2.1
3.6
5.5
3.8
2.9
4.7

2.8
1.1
2.8
6.5
4.6
4.0
8.1

5.6
4.6
10.0
4.2
2.3
22.0
2.2

9.2
6.7
27.2
5.5
4.6
12.5
7.5

6.8
5.1
20.9
4.0
2.8
9.5
3.1

0.5
3.7
–3.2
–3.8
–4.0
7.6
–13.2

–1.5
1.2
–5.2
–5.2
–2.3
–1.8
–13.0

–2.5
–1.0
–4.4
–5.0
–2.8
–3.7
–9.5


34.3





34.6





35.6




Low-Income Countries6
Ethiopia
Kenya
Tanzania
Uganda
Democratic Republic of the Congo
Burkina Faso
Mali

5.9
6.3
7.5
4.9
6.7
6.2
6.9
3.1

4.5
3.8
5.3
4.5
4.4
6.1
3.6
2.5

5.3
5.3
5.1
5.2
5.9
6.7
4.8
5.3

11.2
26.8
6.1
3.7
2.2
9.0
3.9
3.8

16.4
33.6
7.4
4.0
6.4
8.4
14.2
8.0

13.7
28.6
6.6
5.3
6.4
9.8
1.5
3.0

–5.0
–3.2
–5.2
–3.3
–8.3
–0.9
0.2
–10.0

–6.4
–4.3
–5.9
–4.4
–8.0
0.0
–3.5
–7.9

–6.2
–4.4
–5.6
–3.9
–10.2
0.0
–3.4
–7.1






















Sub-Saharan Africa
Oil Exporters4
Nigeria
Angola
Gabon
Chad
Equatorial Guinea

Current Account Balance2
Projections
2021
2022
2023
–1.1
–1.7
–2.5

Unemployment3
Projections
2021 2022 2023


Source: IMF staff estimates.
Note: Data for some countries are based on fiscal years. Please refer to Table F in the Statistical Appendix for a list of economies with exceptional reporting periods.
1Movements in consumer prices are shown as annual averages. Year-end to year-end changes can be found in Table A6 and A7 in the Statistical Appendix.
2Percent of GDP.
3Percent. National definitions of unemployment may differ.
4Includes Republic of Congo and South Sudan.
5Includes Botswana, Cabo Verde, Eswatini, Lesotho, Mauritius, Namibia, and Seychelles.
6Includes Benin, Burundi, Central African Republic, Comoros, Eritrea, The Gambia, Guinea, Guinea-Bissau, Liberia, Madagascar, Malawi, Mozambique, Niger, Rwanda, São Tomé
and Príncipe, Sierra Leone, Togo, and Zimbabwe.

46

International Monetary Fund | October 2022

CHAPTER 1

GLOBAL PROSPECTS AND POLICIES

Annex Table 1.1.6. Summary of World Real per Capita Output
(Annual percent change; in constant 2017 international dollars at purchasing power parity)
Average
2004–13
2.5

2014
2.1

2015
2.1

2016
1.9

2017
2.5

2018
2.4

2019
1.7

2020
–4.1

2021
5.4

1.0
0.9
0.5
1.4
0.6
–0.9
–0.4
0.7
0.5
0.9
2.6

1.5
1.6
1.2
1.8
0.4
–0.1
1.7
0.5
2.2
1.8
2.2

1.7
2.0
1.7
0.6
0.6
0.9
3.9
1.7
1.8
–0.1
1.5

1.3
0.9
1.6
1.4
0.7
1.5
2.9
0.8
1.4
0.0
1.8

2.0
1.6
2.4
2.3
2.2
1.8
2.8
1.8
1.5
1.8
2.5

1.8
2.4
1.6
0.7
1.5
1.1
1.9
0.8
1.0
1.4
2.1

1.3
1.8
1.3
0.8
1.5
0.7
1.3
–0.1
1.1
0.4
1.2

–4.9
–4.2
–6.5
–3.8
–8.2
–8.8
–11.3
–4.3
–9.7
–6.4
–2.3

5.1
5.4
5.2
2.6
6.5
7.4
5.0
1.9
7.0
3.9
5.4

2.2
1.4
2.9
1.4
2.2
3.3
3.9
2.0
3.2
1.9
2.4

0.9
0.7
0.3
–0.4
0.4
–0.1
0.8
2.1
–0.1
0.0
1.8

Emerging Market and Developing Economies
Emerging and Developing Asia
China
India2
ASEAN-54
Emerging and Developing Europe
Russia
Latin America and the Caribbean
Brazil
Mexico
Middle East and Central Asia
Saudi Arabia
Sub-Saharan Africa
Nigeria
South Africa

4.7
7.3
9.7
6.2
4.0
4.1
4.2
2.7
3.0
0.8
2.3
1.3
2.7
4.5
1.9

3.2
5.8
6.7
6.2
3.4
1.5
–1.1
0.1
–0.4
1.6
1.1
2.5
2.3
3.5
–0.1

2.8
5.9
6.5
6.8
3.7
0.5
–2.2
–0.8
–4.4
2.1
0.7
1.7
0.5
0.0
–0.2

2.9
5.8
6.2
7.1
3.9
1.6
0.0
–1.9
–4.1
1.5
2.0
–0.6
–1.2
–4.2
–0.8

3.3
5.7
6.4
5.7
4.3
3.9
1.8
0.3
0.5
1.0
0.0
–3.3
0.2
–1.8
–0.3

3.3
5.6
6.3
5.4
4.3
3.3
2.9
0.2
1.0
1.1
0.5
0.1
0.7
–0.7
0.0

2.3
4.4
5.6
2.7
3.7
2.3
2.2
–1.1
0.4
–1.2
–0.3
–2.0
0.5
–0.4
–1.1

–3.2
–1.5
2.1
–7.5
–4.5
–1.6
–2.3
–8.2
–4.6
–8.9
–4.7
–6.3
–4.3
–4.3
–7.7

5.9
6.5
8.0
7.6
2.5
6.8
5.2
6.0
4.2
3.8
6.0
1.9
2.0
1.1
4.0

2.7
3.7
3.2
5.8
4.3
7.3
–3.3
2.6
2.2
1.2
3.0
5.5
1.0
0.6
0.6

2.6
4.3
4.5
5.1
3.9
0.3
–2.2
0.9
0.4
0.3
1.8
1.6
1.1
0.5
–0.4

Memorandum
European Union
Middle East and North Africa
Emerging Market and Middle-Income Economies
Low-Income Developing Countries

0.9
1.8
5.0
3.6

1.5
0.7
3.3
3.8

2.1
0.5
3.0
2.3

1.9
2.3
3.2
1.5

2.8
–0.7
3.6
2.5

2.0
0.0
3.6
2.7

1.8
–0.9
2.5
2.6

–5.8
–5.1
–3.2
–1.2

5.4
2.4
6.1
2.5

3.0
3.0
3.1
2.5

0.5
1.8
2.9
2.6

World
Advanced Economies
United States
Euro Area1
Germany
France
Italy
Spain
Japan
United Kingdom2
Canada
Other Advanced Economies3

Projections
2022 2023
2.4
1.6

Source: IMF staff estimates.
Note: Data for some countries are based on fiscal years. Please refer to Table F in the Statistical Appendix for a list of economies with exceptional reporting periods.
1Data calculated as the sum of data for individual euro area countries.
2See the country-specific note for India in the “Country Notes” section of the Statistical Appendix.
3Excludes the Group of Seven (Canada, France, Germany, Italy, Japan, United Kingdom, United States) and euro area countries.
4ASEAN-5 comprises Indonesia, Malaysia, Philippines, Thailand, and Vietnam.

International Monetary Fund | October 2022

47

WORLD ECONOMIC OUTLOOK: COUNTERING THE COST?OF?LIVING CRISIS

References
Adler, Gustavo, Romain Duval, Davide Furceri, Sinem Kiliç
Çelik, Ksenia Koloskova, and Marcos Poplawski Ribeiro.
2017. “Gone with the Headwinds: Global Productivity.” IMF
Staff Discussion Note 17/04, International Monetary Fund,
Washington, DC.
Adrian, Tobias, Christopher Erceg, and Fabio Natalucci. 2022.
“Soaring Inflation Puts Central Banks on a Difficult Journey.”
IMF Blog, August 1, 2022.
Akcigit, Ufuk, Wenjie Chen, Federico J. Díez, Romain Duval,
Philipp Engler, Jiayue Fan, Chiara Maggi, and others. 2021.
“Rising Corporate Market Power: Emerging Policy Issues.”
IMF Staff Discussion Note 21/01, International Monetary
Fund, Washington, DC.
Albrizio, Silvia, John Bluedorn, Christoffer Koch, Andrea Pescatori, and Martin Stuermer. 2022. “Market Size and Supply
Disruptions: Sharing the Pain from a Potential Russian Gas
Shut-Off to the European Union.” IMF Working Paper
22/143, International Monetary Fund, Washington, DC.
Andrle, Michal, Patrick Blagrave, Pedro Espaillat, Keiko Honjo,
Benjamin Hunt, Mika Kortelainen, René Lalonde, and
others. 2015. “The Flexible System of Global Models—
FSGM.” IMF Working Paper 15/64, International Monetary
Fund, Washington, DC.
Andrle, Michael, and Benjamin Hunt. 2020. “Model-Based
Globally-Consistent Risk Assessment.” IMF Working Paper
20/064, International Monetary Fund, Washington, DC.
Baffes, John, and Tassos Haniotis. 2016. “What Explains Agricultural Price Movements?” Journal of Agricultural Economics
67 (3): 706–21.
Ball, Laurence, 2009. “Hysteresis in Unemployment: Old and
New Evidence.” NBER Working Paper 14818, National
Bureau of Economic Research, Cambridge, MA.
Ball, Laurence, 2014. “Long-Term Damage from the Great
Recession in OECD Countries.” NBER Working Paper
No. 20185, National Bureau of Economic Research,
Cambridge, MA.
Ball, Laurence M., Daniel Leigh, and Prachi Mishra. Forthcoming. “Understanding U.S. Inflation during the COVID-19
Era.” IMF Working Paper, International Monetary Fund,
Washington, DC.
Barrett, Philip, Sonali Das, Giacomo Magistretti, Evgenia
Pugacheva, and Philippe Wingender. 2021. “After-Effects of
the COVID-19 Pandemic: Prospects for Medium-Term Economic Damage.” IMF Working Paper 21/203, International
Monetary Fund, Washington, DC.
Baumeister, Christiane, and Lutz Kilian. 2014. “Do Oil Price
Increases Cause Higher Food Prices?” Economic Policy 29
(80): 691–747.
Belke, Ansgar, Ingo G. Bordon, and Ulrich Volz. 2013. “Effects
of Global Liquidity on Commodity and Food Prices.” World
Development 44: 31–43.

48

International Monetary Fund | October 2022

Bellemare, Marc F. 2015. “Rising Food Prices, Food Price
Volatility, and Social Unrest.” American Journal of Agricultural
Economics 97 (1): 1–21. https://doi.org/10.1093/ajae/aau038.
Blanchard, Olivier, Eugenio Cerutti, and Lawrence Summers.
2015. “Inflation and Activity—Two Explorations and Their
Monetary Policy Implications.” NBER Working Paper 21726,
National Bureau of Economic Research, Cambridge, MA.
Bogmans, Christian, Andrea Pescatori, and Ervin Prifti. 2021.
“Income versus Prices: How Does the Business Cycle Affect
Food (In)-Security?” IMF Working Paper 21/238, International Monetary Fund, Washington, DC.
Bukeviciute, Lina, Adriaan Dierx, and Fabienne Ilzkovitz. 2009.
“The Functioning of the Food Supply Chain and Its Effect
on Food Prices in the European Union.” Occasional Papers
47, Office for Infrastructures and Logistics of the European
Communities, European Commission, Brussels.
Cloyne, James, and Patrick Hürtgen. 2016. “The Macroeconomic Effects of Monetary Policy: A New Measure for the
United Kingdom.” American Economic Journal: Macroeconomics
8 (4): 75–102.
Coibion, Olivier. 2012. “Are the Effects of Monetary Policy
Shocks Big or Small?” American Economic Journal: Macroeconomics 4 (2): 1–32.
De Loecker, Jan, Jan Eeckhout, and Gabriel Unger. 2020. “The
Rise of Market Power and the Macroeconomic Implications.”
Quarterly Journal of Economics 135 (2): 561–644.
Di Bella, Gabriel, Mark Flanagan, Karim Foda, Svitlana
Maslova, Alex Pienkowski, Martin Stuermer, and Frederik
Toscani. 2022. “Natural Gas in Europe: The Potential Impact
of Disruptions to Supply.” IMF Working Paper 22/145,
International Monetary Fund, Washington, DC.
Díez, Federico J., Daniel Leigh, and Suchanan Tambunlertchai.
2018. “Global Market Power and Its Macroeconomic Implications.” IMF Working Paper 18/137, International Monetary
Fund, Washington, DC.
Díez, Federico J., Jiayue Fan, and Carolina Villegas-Sánchez.
2021. “Global Declining Competition?” Journal of International Economics 132: 103492.
Dimova, Ralitza. 2015. “The Welfare Impact of Rising Food
Prices.” IZA World of Labor 2015: 135.
Duval, Romain, Yi Ji, Longji Li, Myrto Oikonomou, Carlo Pizzinelli, Ippei Shibata, Alessandra Sozzi, and Marina M. Tavares. 2022. “Labor Market Tightness in Advanced Economies.”
IMF Staff Discussion Note 2022/01, International Monetary
Fund, Washington, DC.
Etienne, Xiaoli L., Scott H. Irwin, and Philip Garcia. 2014.
“Bubbles in Food Commodity Markets: Four Decades of
Evidence.” Journal of International Money and Finance 42:
129–55. https://doi.org/10.1016/j.jimonfin.2013.08.008.
Food and Agriculture Organization (FAO), International Fund
for Agricultural Development (IFAD), United Nations
Children’s Fund (UNICEF), World Food Programme (WFP),

CHAPTER 1

and World Health Organization (WHO). 2021. “The State of
Food Security and Nutrition in the World 2021: Transforming Food Systems for Food Security, Improved Nutrition and
Affordable Healthy Diets for All.” Rome, FAO.
Ferrucci, Gianluigi, Rebeca Jiménez-Rodríguez, and Luca
Onorante. 2012. “Food Price Pass-Through in the Euro
Area: Non-Linearities and the Role of the Common Agricultural Policy.” International Journal of Central Banking 8
(1): 179–217.
Flanagan, Mark, Alfred Kammer, Andrea Pescatori, and Martin
Stuermer. “How a Russian Natural Gas Cutoff Could Weigh
on Europe’s Economies.” IMFBlogs, July 19, 2022. https://
blogs.imf.org/2022/07/19/how-a-russian-natural-gas-cutoff
-could-weigh-on-europes-economies.
Furceri, Davide, Prakash Loungani, John Simon, and Susan M.
Wachter. 2016. “Global Food Prices and Domestic Inflation:
Some Cross-Country Evidence.” Oxford Economic Papers 68
(3): 665–87. https://doi.org/10.1093/oep/gpw016.
Gilbert, Christopher L. 2010. “How to Understand High
Food Prices.” Journal of Agricultural Economics 61 (2):
398–425. https://doi.org/10.1111/j.1477-9552.2010.00248.x.
Giordani, Paolo E., Nadia Rocha, and Michele Ruta. 2016.
“Food Prices and the Multiplier Effect of Trade Policy.” Journal of International Economics 101: 102–22. https://doi.org/
10.1016/j.jinteco.2016.04.001.
Gnutzmann, Hinnerk, and Piotr Spiewanowski. 2016. “Fertilizer
Fuels Food Prices: Identification through the Oil-Gas Spread.”
Unpublished, Leibniz Universität Hannover and Polish Academy of Sciences. http://dx.doi.org/10.2139/ssrn.2808381.
Gopinath, Gita, Emine Boz, Camila Casas, Federico J. Díez,
Pierre-Olivier Gourinchas, and Mikkel Plagborg-Møller.
2020. “Dominant Currency Paradigm.” American Economic
Review 110 (3): 677–719.
Harding, Don, and Adrian Pagan. 2002. “Dissecting the Cycle:
A Methodological Investigation.” Journal of Monetary Economics 49 (2): 365–81.
Harris, Donald J. 1970. “Income, Prices, and the Balance of
Payments in Underdeveloped Economies: A Short-Run
Model.” Oxford Economic Papers 22 (2): 156–72. https://www
.jstor.org/stable/2662255.

GLOBAL PROSPECTS AND POLICIES

Holston, Kathryn, Thomas Laubach, and John C. Williams.
2017 “Measuring the Natural Rate of Interest: International
Trends and Determinants.” Journal of International Economics
108 (Supp. 1): S59–75. https://doi.org/10.1016/j.jinteco
.2017.01.004.
Konczal, Mike, and Niko Lusiani. 2022. “Prices, Profits, and
Power: An Analysis of 2021 Firm-Level Markups.” Brief,
Roosevelt Institute, New York. https://rooseveltinstitute.org/
publications/prices-profits-and-power.
Laborde Debucquet, David, and Abdullah Mamun. 2022.
“Documentation for Food and Fertilizers Export Restriction
Tracker: Tracking Export Policy Responses Affecting Global
Food Markets during Crisis.” Food and Fertilizer Trade Policy
Tracker Working Paper 2, International Food Policy Research
Institute, Washington, DC.
Ng, Francis, and M. Ataman Aksoy. 2008. “Food Price Increases
and Net Food Importing Countries: Lessons from the Recent
Past.” Agricultural Economics 39 (S1): 443–52.
Novta, Natalija, and Evgenia Pugacheva. 2021. “The Macroeconomic Costs of Conflict.” Journal of Macroeconomics
68: 103286.
Novta, Natalija, and Evgenia Pugacheva. 2022. “Macroeconomic
Costs of Conflict: Impact on GDP and Refugee Flows.”
VoxEU, July 29, 2022. https://cepr.org/voxeu/columns/
macroeconomic-costs-conflict-impact-gdp-and-refugee-flows.
Osborn, T. J., Jones, P. D., Lister, D. H., Morice, C. P., Simpson, I. R., Winn, J. P., et al. (2021). Land surface air
temperature variations across the globe updated to 2019:
the CRUTEM5 dataset. Journal of Geophysical Research:
Atmospheres, 126, e2019JD032352. https://doi.org/10.1029/
2019JD032352.
Unsal, D. Filiz, Chris Papageorgiou, and Hendre Garbers. 2022.
“Monetary Policy Frameworks: An Index and New Evidence.”
IMF Working Paper 22/22, International Monetary Fund,
Washington, DC.
Yellen, Janet L. 2016. “Macroeconomic Research after the
Crisis.” Speech delivered at the 60th Annual Federal Reserve
Bank of Boston Economic Conference, “The Elusive ‘Great’
Recovery: Causes and Implications for Future Business Cycle
Dynamics.” Boston, October 14.

International Monetary Fund | October 2022

49

CHAPTER

2

WAGE DYNAMICS POST?COVID?19 AND WAGE?PRICE SPIRAL RISKS

Inflation rose markedly in many economies during
2021, reflecting a mix of supply- and demand-side
drivers amid recovery from the COVID-19 shock.
Although nominal wage growth has so far generally stayed below inflation, some observers have
warned that prices and wages could start feeding off
each other, with wage and price inflation continually ratcheting up in a sustained wage-price spiral.
This chapter unpacks events of the recent past and
sheds light on future prospects using a mix of empirical and model-based analyses. Historical episodes
in advanced economies exhibiting wage, price, and
labor market dynamics similar to those of the current
circumstances—in particular, economies in which real
wages (nominal wages deflated by consumer prices)
have been flat or falling—did not tend to show a
subsequent wage-price spiral. Model-based analysis
suggests that different shocks underpinned wage and
price developments through 2020–21: production
capacity shocks predominantly drove wages, while private saving and pent-up demand figured prominently
for prices. Empirical analysis suggests that while labor
market conditions remain relevant drivers of wage
growth, the importance of inflation expectations has
recently increased. A forward-looking analysis points to
the critical role of the expectations process in shaping
prospects. It demonstrates how front-loaded monetary
policy tightening, including through its clear communication, can lower the risk that inflation will become
de-anchored from its target. Given that inflationary
shocks are originating outside the labor market, falling
real wages are helping to slow inflation, and monetary
policy is tightening more aggressively, the chances of
persistent wage-price spirals emerging appear limited.

The authors of this chapter are Silvia Albrizio, Jorge Alvarez,
Alexandre Balduino Sollaci, John Bluedorn (lead), Allan Dizioli,
Niels-Jakob Hansen, and Philippe Wingender, with support from
Youyou Huang and Evgenia Pugacheva. The chapter benefited
from comments by Jason Furman and internal seminar participants
and reviewers.

Introduction
With the recovery picking up steam after the
acute COVID-19 shock, inflation in 2021 started
hitting levels that had not been seen in almost
40 years in many economies.1 A wide array of
factors has underpinned the sharp rises in prices,
including pandemic-related supply chain disruptions, commodity price shocks, expansive monetary policy and fiscal support, a surge in pent-up
consumer demand, and changes in consumer
preferences for goods versus services (Figure 2.1,
panels 1 and 3).
At the same time, economic recovery brought a
resurgence in demand for labor in many sectors.
Labor supply was slow to respond, with some workers
hesitant to reengage because of ongoing health concerns and difficulties finding child and family care,
among other factors.2 This demand–supply imbalance led to tighter labor markets and increased wage
pressures, with average nominal wages (per worker)
rising and the unemployment rate falling beginning
in the second half of 2020 across economy groups
(Figure 2.1, panels 2 and 5 for advanced economies
and panels 4 and 7 for emerging market and developing economies).3
Growth in nominal wages mostly brought the
average level in 2021 back to the pre-pandemic trend,
although there were differences across economies.
Importantly, nominal wage growth in 2021 did not

1Price inflation is defined with respect to the consumer price
index throughout, unless indicated otherwise.
2See Bluedorn and others (2021) for a discussion of how the
COVID-19 shock generated a “she-cession,” reflecting in part the
disproportionate impact of these factors on women’s employment.
See also ILO (2022) for a more recent assessment of the shock’s
effects on employment and participation and the differentials
between men’s and women’s outcomes.
3To achieve the broadest sample coverage possible in the empirical
analysis, wages (nominal or real) are defined on a per employed
worker basis throughout, unless indicated otherwise. For a smaller
sample, the chapter includes some discussion highlighting how
hourly wages differ.

International Monetary Fund | October 2022

51

WORLD ECONOMIC OUTLOOK: COUNTERING THE COST?OF?LIVING CRISIS

Figure 2.1. Recent Wage, Price, and Unemployment Dynamics
(Index, 2019:Q4 = 100, unless noted otherwise)
Consumer price in?ation has accelerated mar edly since the second uarter of 2020. hile the nominal wage largely returned to its pre pandemic trend, real wages
have dipped below their pre pandemic trend. nemployment rates have continued to decrease as the economy recovers from the C
shoc .

Advanced Economies
0

1. Consumer Prices

Emerging Market and Developing Economies
4. Unemployment Rate
(Percent)

3. Consumer Prices

2. Unemployment Rate
(Percent)

0

0

00

00

2

5
2

20 :

:

:

20:

2 : 2 :

20 :

0

0 5. Nominal Wage

:

:

20:

2 : 2 :

6. Real Wage

20 :

:

:

20:

20 :

2 : 2 :

:

:

20:

2 : 2 :

8. Real Wage

7. Nominal Wage

0

0

0

00
00

00

00
2

0
20 :

:

:

20:

2 : 2 :

20 :

:

:

20:

2 : 2 :

20 :

:

:

20:

2 : 2 :

20 :

:

:

20:

2 : 2 :

ources: aver Analytics nternational abour rganization rganisation for conomic Co operation and evelopment
ureau of conomic Analysis and F
staff calculations.
Note: lue lines represent the median across economies dashed lines indicate the pre C
trend shaded areas represent the inter uartile range across
economies. ages (nominal and real) are calculated on a per wor er basis. ee nline Annex 2. for details on the sample coverage.

fully keep up with price inflation.4 This means that
the path of real wages (nominal wages deflated by
consumer prices) was fairly flat or falling (Figure 2.1,
panels 6 and 8). Against a backdrop of high or even
rising price inflation, these nominal and real wage
patterns have continued into the first quarter of 2022
for economies for which data are available.

4The distinction between wages per worker and wages per hour
became relevant during the pandemic’s acute phase, as hours worked
were sharply adjusted for many workers (particularly in advanced
economies). Annex Figure 2.1.1 shows the dynamics of wages per
hour: spiking in the second quarter of 2020 on average across economy groups, but quickly returning to trend. Similarly to the patterns
for wages per worker, wages per hour fell short of price inflation by
the end of 2021.

52

International Monetary Fund | October 2022

At a sectoral level, nominal wages in both industry
and services have tended to converge to their common
pre-pandemic trends across economy groups (see Online
Annex 2.2 for details on the sectoral perspective). In
advanced economies, real wages across sectors largely
matched their pre-pandemic trend, before deteriorating in
the latter half of 2021 as inflation rose, while in emerging market and developing economies, they have stayed
mostly below their pre-pandemic trend. Consistent with
the picture of wages by sector, sectoral employment shifts
so far have appeared to contribute little to overall wage
changes for the average economy—common changes in
wages across sectors themselves account for the lion’s share
of the average overall wage change.
Some observers argue that recent wage and price
dynamics could change, so that rising inflation

2

CHAPTER 2

expectations and tighter labor markets push workers
to persistently demand wage increases to catch up to
or exceed recent inflation. Such a “wage-price spiral” is
defined here as an episode of several quarters characterized by accelerating wages and prices (that is, in which
both wage and price inflation rates rise simultaneously).5
This chapter aims to better understand the current
circumstances and prospects for wage and price inflation. To this end, crucial questions addressed include
the following:
• How do wage, employment, and price dynamics
in the recovery from the COVID-19 shock compare with pre-pandemic dynamics? Did historical
episodes mirroring 2021 patterns in wages, employment, and prices in advanced economies subsequently evolve into wage-price spirals?
• How well do inflation expectations and labor market conditions explain recent nominal wage growth
in advanced and emerging market and developing
economies? What were the deeper, underlying drivers
of wages, prices, and employment during 2020–21?
• Could wage and price pressures in the wake of
COVID-19 lead to high and persistent wage and
price inflation? Have wage and price pressures from
past inflationary shocks due to increasing global
supply pressures lasted long? Historically, has monetary tightening been effective in reducing wage and
price pressures? Looking ahead, how could changes
in the formation of wage and price expectations
affect prospects, and how should policymakers take
them into account?

WAGE DYNAMICS POST?COVID?19 AND WAGE?PRICE SPIRAL RISKS

Drawing both on empirical and model-based analyses,
the chapter’s main findings are as follows:
• Both wage and price inflation picked up in a broad-based
manner through 2021, while real wages have tended to be
flat or falling across economies on average. At a sectoral
level, nominal wages in both industry and services
tended to converge to their common pre-pandemic
trends across economy groups. Consequently, sectoral
employment shifts appear to explain little of overall
wage changes through the end of 2021.
• On average, wage-price spirals did not follow historical episodes that were similar to the circumstances
currently seen in advanced economies. Although
the COVID-19 shock is unusual and the current

conjuncture unlike much recent experience,
similar historical episodes of inflation in advanced
economies—in which real wages were flat or
falling—did not tend to entail a wage-price spiral.
In fact, inflation tended to fall in the aftermath
while nominal wages gradually caught up.
• Changes in inflation expectations and labor market
slack explain wage dynamics in the second half of 2021
relatively well. In the immediate aftermath of the
COVID-19 shock, wage growth across economies
was poorly explained by its earlier empirical relationship with expectations and unemployment. However, by the end of 2021, wage growth was broadly
in line with the increases in inflation expectations
and labor market tightening observed across economy groups on average.
• Reflecting the pandemic shock’s unusual nature, a
complex mix of supply and demand shocks underpinned
the 2020–21 behavior of wages and prices. Analysis
using a rich multi-sector, multi-economy structural
model points to differences in the shocks underlying historical changes in wages and prices. Over the
two years since the pandemic’s onset, wages have
been driven predominantly by production capacity
and labor supply shocks (from social distancing and
lockdowns), while prices have been more affected by
private saving and the release of pent-up demand.
How and when (or if ) these deeper shocks unwind
will matter for how wage and price inflation develop.
• When wage and price expectations are more
backward-looking, monetary policy actions need to be
more front-loaded to minimize the risks of inflation
de-anchoring. Using a newly developed model of
expectations and wage and price setting, scenario analysis suggests that the observed decline in real wages
has acted as a drag so far, reducing price pressures and
thereby helping inhibit development of a wage-price
spiral dynamic. However, the more backward-looking
(adaptive) expectations are, the greater the chances
that inflation could de-anchor to a higher-than-target
level. The monetary policy response in this inflationary environment should depend on the nature of wage
and price expectations: the more backward-looking
they are, the quicker and stronger the tightening
needed to avert inflation de-anchoring and prevent
large declines in the real wage.

5See Boissay and others (2022) for a similar definition and
discussion on the debate about the possible emergence of wage-price
spirals in advanced economies. Further discussion of the concept is
in this chapter’s section titled “Historical Episodes Similar to Today.”

Some important caveats to the analysis presented here
should be stated up front. First, the empirical analysis
is constrained by the availability of data, both across
International Monetary Fund | October 2022

53

WORLD ECONOMIC OUTLOOK: COUNTERING THE COST?OF?LIVING CRISIS

economies and over time. Hence, the exact sample coverage differs across exercises. Second, although the empirical methods used are standard, their findings should be
interpreted as associational rather than causal. Third, the
empirical analysis and study of historical episodes essentially summarize past patterns in the data, which may
not be fully representative of the current circumstances.
Moreover, if the COVID-19 shock caused a large structural break in the economy’s behavior (such as a sharp
shift in expectations formation or wage-setting processes),
historical analyses may not be as informative about future
prospects. The model-based analysis of expectations
provides some insurance against structural breaks, since it
allows for the possibility of a limited form of regime shifts
in its examination of adaptive learning.
The chapter begins by identifying and examining historical episodes exhibiting wage, price, and employment
patterns similar to those in the current circumstances,
highlighting how the episodes subsequently developed.
The chapter continues by studying how well recent
wage dynamics can be explained by changes in inflation
expectations and labor market slack and the composition of shocks driving these developments. In the penultimate section, the chapter highlights how inflationary
shocks and monetary tightening affect wage (both nominal and real) dynamics. The final section considers how
the processes for forming expectations regarding wages
and prices may interact with the shock and monetary
policy’s responses to affect the economy’s future path.

The current coincidence of rising inflation and nominal wage growth has led to concerns that a wage-price
spiral—in which both wages and prices accelerate
for a prolonged period—could emerge.7 This section
examines whether wage-price spirals have occurred in
similar past episodes.

Similar Past Episodes Do Not Show a Wage-Price
Spiral Taking Hold

As explained in the introduction, rising inflation,
positive nominal wage growth, declining real wages,
and declining unemployment characterized the macroeconomic situation in 2021 in many economies.
Although unusual, such conditions are not unprecedented. A sample of advanced economies covering the
past 40 years (and for a few the past 60 years) reveals
22 other episodes exhibiting similar conditions.6

Similar past episodes were not followed by a
wage-price spiral, in which both inflation and nominal wage growth keep rising over a prolonged period
(Figure 2.2, panels 1 and 3). Nominal wage growth
did tend to increase somewhat after these episodes, but
inflation edged down on average. In combination, this
led to an increase in real wages (Figure 2.2, panel 4).
The unemployment rate generally stabilized after the
episodes (Figure 2.2, panel 2).
Although the average subsequent path suggests
little cause for alarm, there is heterogeneity across
historical episodes. A notable example is the United
States in the second quarter of 1979, when inflation
was on a sharp upward path immediately following
the episode, rising rapidly for four quarters before
starting to decline. The unemployment rate also
rose more than during the other identified episodes.
Underlying these changes was an aggressive monetary
tightening that began around the time of the inflation peak: the so-called Volcker disinflation. Nominal
wage growth—which had not shown signs of continuing its upward path—was relatively flat during
this period, leading to a decline in real wages early
on. But as inflation came down, the deterioration in
real wages decreased.
A similar policy response is observed in many of the
other episodes as well. In fact, monetary policy tightening followed most of the past episodes, which helped
to keep inflation contained.8 Thus, the evidence from
similar historical episodes suggests that an appropriate

6The 22 episodes are identified within a sample of 30 advanced
economies for which data on inflation, wages, prices, and unemployment are available at a quarterly frequency going back to 1960 at the
earliest. For most economies in the sample, the quarterly data begin
on a regular basis only in the 1980s. The selection criteria are that at
least three out of the previous four quarters had (1) rising inflation,
(2) positive nominal wage growth, (3) declining real wages, and
(4) declining or flat unemployment. If the criteria hold for several
quarters within three years, only the first episode in which the criteria held is selected. See Online Annex 2.3 and Alvarez and others
(forthcoming) for further details and discussion about these episodes.

7The earlier literature on wage-price spirals has considered
a wide array of definitions, ranging from a simple feedback
between wages (as a cost of production) and prices, to a coincident acceleration of wages and prices, to a situation in which
wage inflation persistently exceeds price inflation. As noted in
the introduction, this chapter defines a wage-price spiral as an
episode of several quarters characterized by accelerating wages
and prices (that is, in which wage and price inflation are rising
simultaneously).
8Out of the 22 episodes illustrated in Figure 2.2, 13 were followed
by monetary policy tightening (Annex Table 2.3.2).

Historical Episodes Similar to Today

54

International Monetary Fund | October 2022

CHAPTER 2

Figure 2.2. Changes in Wages, Prices, and Unemployment
after Similar Past Episodes
(Percentage point differences relative to ?rst quarter in which criteria are
ful?lled)
After past episodes with similar macroeconomic conditions to today’s, consumer
price in?ation typically declined, while nominal and real wage growth increased.
Median
US, 1979:Q2 = 0

10th–90th percentile range
COVID-19, 2021:Q4 = 0

6 1. Consumer Price In?ation

2. Unemployment Rate

6

4

4

2

2

0

0

–2

–2

–4
–3

0
3
6
9
Quarters after episode

11

–3

8 3. Nominal Wage Growth

0
3
6
9
Quarters after episode

–4
11

4. Real Wage Growth

8

6

6

4

4

2

2

0

0

–2

–2

–4
–3

0
3
6
9
Quarters after episode

11

–3

0
3
6
9
Quarters after episode

–4
11

Sources: International Labour Organization; Organisation for Economic
Co-operation and Development; US Bureau of Economic Analysis; and IMF staff
calculations.
Note: The ?gure shows developments following episodes in which at least three of
the preceding four quarters have (1) accelerating prices/rising price in?ation,
(2) positive nominal wage growth, (3) falling or constant real wages, and
(4) a declining or ?at unemployment rate. Twenty-two such episodes are identi?ed
within a sample of 30 advanced economies, the earliest going back to 1960. The
COVID-19 episode represents an average of economies in the sample for the
period starting in 2021:Q4. See Online Annex 2.3 for details.

monetary policy response can contain the risks of a
subsequent wage-price spiral in the current circumstances to very low levels.

Wage-Price Spiral Episodes Did Not Typically Last Long
Turning to past episodes of wage-price spirals
(regardless of the behavior of real wages or unemployment), further sustained wage-price acceleration

WAGE DYNAMICS POST?COVID?19 AND WAGE?PRICE SPIRAL RISKS

did not typically follow the initial dynamics.9
Following such episodes, inflation and nominal
wage growth on average tended to stabilize in the
subsequent quarters, leaving real wage growth
broadly unchanged (Figure 2.3, blue lines). At the
same time, the unemployment rate tended to edge
down slightly.
However, in some rare examples, more extreme
outcomes followed such episodes. For example,
during the US episode starting in the third quarter
of 1973, price inflation surged for five additional
quarters—spurred by the first Organization of the
Petroleum Exporting Countries oil embargo of
the 1970s—before starting to come down in 1975
(Figure 2.3, red lines). On the other hand, nominal wage growth did not increase, leading real wage
growth to decline. Another relevant example is that
from Belgium during 1973, in which both nominal
wage growth and price inflation surged markedly
before coming down (see Online Annex 2.3). In that
case, wage growth was high and exceeded price inflation for a while, partly owing to the wide prevalence
of wage indexation.10
Farther back in time, another notable example
occurred in 1946–48 in the United States, just after
World War II concluded. Over those years, price
controls due to the war were lifted and pent-up
demand was released. As the economy shifted from
wartime, price inflation and nominal wage growth
picked up during 1946, both reaching about 20 percent year over year by the first quarter of 1947.11
Thereafter, though, inflation and wage growth
started to come down gradually while remaining at
high levels for about a year. Toward the latter half
of 1948 and into early 1949, inflation came down
sharply, as supply chains had readjusted and pent-up

9A wage-price spiral episode is identified if, for at least three
of the preceding four quarters, (1) wages were accelerating
(wage growth was rising) and (2) prices were accelerating (price
inflation was rising). Note that these are less restrictive criteria
than those used to identify historical episodes similar to today’s
circumstances.
10See also Battistini and others (2022) and Baba and Lee
(2022) for further discussion and analysis of the historical effects
of oil price and energy shocks on price inflation and wages and
the effects’ relationship to an economy’s structural characteristics.
11Wages are proxied by average hourly earnings in manufacturing, as an economy-wide wage measure is not available that far
back in time.

International Monetary Fund | October 2022

55

WORLD ECONOMIC OUTLOOK: COUNTERING THE COST?OF?LIVING CRISIS

Figure 2.3. Changes in Wages, Prices, and Unemployment
after Past Episodes with Accelerating Prices and Wages
(Percentage point differences relative to ?rst quarter in which criteria are
ful?lled)
A period of stable wage growth and in?ation typically followed past episodes with
accelerating wages and prices.
Median

10th–90th percentile range

6 1. Consumer Price In?ation

US, 1973:Q3 = 0

2. Unemployment Rate

6

4

4

2

2

0

0

–2

–2

–4
–3

0
3
6
9
Quarters after episode

11

–3

4 3. Nominal Wage Growth

0
3
6
9
Quarters after episode

–4
11

4. Real Wage Growth

4
2

0

0
–2

–2

–4

–4
0
3
6
9
Quarters after episode

11

–3

0
3
6
9
Quarters after episode

–6
11

Sources: International Labour Organization; Organisation for Economic
Co-operation and Development; US Bureau of Economic Analysis; and IMF staff
calculations.
Note: The ?gure shows the developments following episodes in which at least
three of the preceding four quarters have (1) accelerating prices/rising price
in?ation and (2) accelerating nominal wages/rising nominal wage growth.
Seventy-nine such episodes are identi?ed within a sample of 30 advanced
economies, the earliest going back to 1960. The bands indicate the 10th–90th
percentile of the outcomes in the identi?ed episodes. See Online Annex 2.3 for
details.

demand became exhausted (with a mild recession
in 1949).12
Overall, the historical evidence suggests that
episodes characterized by about a year of accelerating prices and wages have not generally lasted, with
12See Online Annex 2.3 for further details on this case. Rouse,
Zhang, and Tedeschi (2021) also describe this and other past
inflationary episodes in the United States with some features similar
to those in today’s recovery from the pandemic. Caplan (1956)
provides a close-in-time and in-depth discussion of the situation in
the late 1940s.

56

International Monetary Fund | October 2022

Wage Drivers during the COVID-19 Shock
and Recovery
This section studies wage, price, and employment
drivers in the context of the pandemic and subsequent recovery. It first examines recent wage dynamics
empirically through the lens of the wage Phillips curve,
which relates wage growth to inflation expectations
and labor market slack. The section then attempts to
further unpack wage and price changes over the past
two years, using a rich structural model to identify the
complex mix of underlying supply and demand shocks
driving wages and prices.

6

2

–6
–3

nominal wage growth and price inflation tending to
stabilize on average. It is important to remark that
this means that inflation and wage growth remained
elevated for several quarters on average after these
past episodes.13

An Empirical Decomposition of Recent Dynamics Using
the Wage Phillips Curve
Although the COVID-19 shock and recovery
bear many unusual features, a recurring question is
whether previous economic relationships can still
explain recent dynamics. For wages, this means
examining whether empirical estimates using the
workhorse wage Phillips curve—relating wage
growth to measures of inflation expectations, labor
market slack, and productivity growth—do well at
capturing the variation in wage developments.14 The
chapter first employs this framework to study the
pre–COVID-19 wage-setting process. It then uses
13The relevance of this finding hinges critically on the sample
coverage. As in Figure 2.2, quarterly time coverage for the critical
variables starts only in the 1980s or later for most economies. For
robustness, the exercise was thus repeated using a narrower wage
concept (hourly earnings for the manufacturing sector only) allowing
for time coverage back to the early 1970s for more economies. This
did not overturn the broad results shown in Figure 2.3, although
a few additional extreme outcomes were identified. See Online
Annex 2.3 for additional information.
14The specification used is based on Chapter 2 of the October
2017 World Economic Outlook, inspired by Galí’s (2011) work
micro-founding the wage Phillips curve as the outcome of a
wage-setting process. The baseline specification using the unemployment rate and its change as measures of labor market slack
permits wider coverage of advanced and emerging market economies
in the sample. Given recent inflation dynamics, the relationship
between wage growth and inflation expectations is a key focus of this
chapter’s study. Online Annex 2.4 includes details on the baseline
specification.

CHAPTER 2

WAGE DYNAMICS POST?COVID?19 AND WAGE?PRICE SPIRAL RISKS

the framework to decompose wage growth changes
since the pandemic across economy groups, to see
how well it performs.

Figure 2.4. A Look at Nominal Wage Growth through the Lens
of the Wage Phillips Curve

Wage Growth Tends to Rise with
Inflation Expectations and Fall with
Labor Market Slack

Wage dynamics during COVID-19 did not follow the wage Phillips curve
relationship closely, but more recent nominal wage growth is consistent with
rising in?ation expectations and labor market tightening.

Consistent with earlier empirical and theoretical
literature, the analysis suggests that rises in inflation
expectations15 and productivity growth are associated
with increases in nominal wage growth, while increases
in labor market slack (captured by the unemployment
rate and its change) are correlated with a slowdown in
wage growth (Figure 2.4, panel 1). These relationships
are statistically significant in both the advanced and
emerging market economy groups.
The positive relationship with inflation
expectations—a focus of the conjuncture—is consistent with a forward-looking wage-setting process
in which workers demand higher wages as prices are
expected to rise.16 These nominal wage pressures add
to those stemming from increases in the real returns
on labor—as captured by productivity growth—and
survive even if lagged inflation is controlled for. Wage
growth appears to be highly sensitive to inflation
expectations in advanced economies: a 1 percentage
point increase in inflation expectations is associated with a close to 1 percentage point increase in
wage growth (compared with 0.6 percentage point
in emerging market economies). This relationship,
however, weakened in the period after the global
financial crisis, when inflation was remarkably low
and stable.17
The negative relationship with unemployment is
consistent with high (or widening) slack in the labor
market, which reduces wage pressures as workers
struggle to find jobs and accept lower wages. This
last correlation is robust to using other measures
of labor market slack, such as unemployment gaps,
which allow for time-varying natural unemployment

15This section focuses on one-year-ahead inflation expectations.
See Online Annex 2.1 for details on the measure used.
16Additional robustness checks, including lagged inflation as a
regressor, are shown in Online Annex 2.4.
17See Online Annex 2.4 for a discussion of how coefficients have
declined in advanced economies. Part of this observed flattening in
the wage Phillips curve may reflect improvements in monetary policy
credibility, as discussed by Hazell and others (2022) for the price
Phillips curve.

(Percentage points)

1.5 1. Wage Phillips Curve Coef cients
1.0
0.5
0.0
–0.5
–1.0
–1.5

Advanced economies
Emerging market economies

–2.0
–2.5

In?ation
expectations

Unemployment

Unemployment
change

Productivity

4 2. Decomposition of Nominal Wage Growth, Advanced Economies
2
0
–2
–4
–6
2017:Q1

In?ation expectations
Unemployment
Unemployment change
Other
Total change in wage growth
18:Q1

19:Q1

20:Q1

21:Q1

21:Q4

6 3. Decomposition of Nominal Wage Growth, Emerging Market
Economies
4
2
0
–2
–4
–6
–8
2017:Q1

In?ation expectations
Unemployment
Unemployment change
Other
Total change in wage growth
18:Q1

19:Q1

20:Q1

21:Q1

21:Q4

Source: IMF staff calculations.
Note: Panel 1 reports the estimated effects (coef?cients) from 1 percentage point
rises in the indicated variables from a wage Phillips curve regression. The sample
covering 2000:Q1–19:Q4 consists of 31 advanced and 15 emerging market
economies. Whiskers indicate 90 percent con?dence intervals. See Online
Annex 2.1 for further details on the sample and estimation. For panels 2 and 3,
bars show contributions of each component relative to the contributions observed
in 2019:Q4. Contributions are calculated using pooled wage Phillips curve
coef?cients for the indicated economy group. Line depicts average overall nominal
wage growth per worker observed relative to 2019:Q4. Only economies with
continuously available data from 2017:Q1–21:Q4 are used for the contributions and
aggregated using GDP purchasing-power-parity weights. “Other” category contains
the contributions of productivity growth, the residual, and time ?xed effects.

International Monetary Fund | October 2022

57

WORLD ECONOMIC OUTLOOK: COUNTERING THE COST?OF?LIVING CRISIS

rates and unemployment-to-vacancy ratios.18 Point
estimates suggest that emerging market wages can
be more sensitive than those in advanced economies to changes in labor market and productivity
conditions, although variation in past experiences is
substantial.
Part of the heterogeneity in experiences could be
due to differences across economies and over time
in structural factors that may affect wage-setting
processes. In economies with more stringent employment protections, wage growth appears to be on
average more sensitive to changes in labor market
slack (unemployment) and inflation expectations
(Figure 2.5, panel 1). This would be consistent with
labor prices (wages) adjusting faster to changing conditions when restrictions on labor quantities (firing
or hiring of workers) are present. In economies in
which firms exhibit greater market power in product
markets—as proxied by the average price markup—
wages appear slightly more responsive to unemployment changes (Figure 2.5, panel 2). Such a finding is
consistent with evidence from the literature showing
that higher-markup firms are more likely to use their
margins to absorb cost changes and preserve their
market shares.19
Relatedly, using long cross-sectional time
series for Europe that help identify the effects of
within-economy structural changes, Baba and Lee
(2022) find that the pass-through of inflation shocks
(captured by oil price changes) to wages can increase
when union density and the degree of centralized

18There has recently been much discussion about how
alternative slack measures—such as unemployment rate gaps
(unemployment rate minus natural rate of unemployment) and
the ratio of the number of unemployed people to the number of job vacancies in an economy—could perform better. In
robustness checks for the larger sample, using the unemployment
gap does not make any marked differences in the relationships
discussed. To study the unemployment-to-vacancy ratio, a further
robustness check using the US (for which data are available on a
sufficiently long basis) was also conducted, with broadly similar
results, although the unemployment-to-vacancy ratio performed
better in explaining recent wage growth. This is similar to the
evidence from Ball, Leigh, and Mishra (forthcoming), who find
that the price Phillips curve using the unemployment-to-vacancy
ratio explains inflation since the COVID-19 shock better in the
US than alternative measures, without sacrificing its explanatory
power before the pandemic. See Online Annex 2.4 for further details.
19See Box 2.1 for some discussion of this mechanism and
Box 1.2 for a discussion of the relationship between market power
and inflation.

58

International Monetary Fund | October 2022

Figure 2.5. The Role of Structural Characteristics in Wage
Dynamics
(Percentage points)
Regulatory and structural features can shape how unemployment and in?ation
expectations affect nominal wages.
2.0 1. Stringency of Employment Protection Regulation
1.5
1.0
0.5
0.0
–0.5

Low

High

–1.0
–1.5

Unemployment

In?ation expectations

1.5 2. Firm Markups
1.0
0.5
0.0
–0.5

Low

High

–1.0
–1.5

Unemployment

In?ation expectations

Source: IMF staff calculations.
Note: The ?gure shows average marginal effects of unemployment and in?ation
expectations on nominal wage growth, conditional on the level of the structural
characteristic. High (low) refers to the average value of each structural indicator,
given that it is above (below) the cross-economy median. “Stringency of
employment protection regulation” refers to a composite indicator on the
stringency of regulations related to individual dismissal of workers on regular
contracts. The indicator of “?rm markups” (a measure of ?rms’ market power in
output markets) is the sales-weighted average of sectoral markups. See Online
Annex 2.4 for details.

bargaining are high.20 Although disentangling specific
structural factors that cause differences in wage
setting is empirically challenging, these results and
others from the literature suggest that regulatory,
institutional, and structural features affect wages’
responsiveness to changes in inflation expectations and slack.
20Battistini and others (2022) also analyze the effects of energy
shocks, comparing the second-round effects in the 1970s with those
from today using model simulations calibrated to the relevant economic features. They find only limited second-round effects in the
present circumstances, unlike what was observed in the 1970s. This
difference likely reflects changes in economic structure, particularly
in labor market bargaining and wage-setting processes. See also
Boissay and others (2022) for additional discussion.

CHAPTER 2

Wage Changes Were Highly Unusual in the
Acute Pandemic Phase but Recently Appear
Broadly in Line with Developments in Inflation
Expectations and Slack
How wages respond to changing conditions in labor
markets and inflation also depends on the sources of
shocks and their mechanics. The COVID-19 shock’s
unprecedented nature and asymmetric sectoral effects
meant that, overall, average wages did not move in line
with the relationships predicted by the wage Phillips
curve. A decomposition of average wage growth in
advanced and emerging market economies using the
wage Phillips curve unveils several notable features
(Figure 2.4, panels 2 and 3).
First, both the acute shock and the recovery were
unique, exhibiting abrupt swings that deviated from
those explained by inflation expectations and unemployment changes according to the estimated wage
Phillips curve.21 Only part of these deviations was
due to movements in hours worked, as employers
and employees adjusted along the intensive margin
of employment.22 Importantly, the deviations were
quantitatively and qualitatively different from those
observed in the years preceding the pandemic and
during the global financial crisis.23 They also differed
across economies. At the beginning of the pandemic,
the drop in wage growth was less prominent than
predicted by inflation and unemployment movements
in advanced economies (particularly in the US), while
the opposite was true in emerging markets.24
Second, in both advanced and emerging market
economies, the recovery of wage growth since the crisis
peak has been largely in line with the observed drops
in unemployment and increase in inflation expectations. In fact, by the end of 2021, wage growth in
advanced economies did not seem to be abnormally
above that predicted by falling unemployment and
rising inflation expectations alone, with a shrinking
21The

large increase in temporary layoffs observed in some economies, which were particularly concentrated among lower-paid workers, could partly explain these wage growth swings (Duval and others
2022). This reason is also cited for some of the strange behavior of
the price Phillips curve in the United States (Ball and others 2021).
22See Online Annex 2.4 for a decomposition including hours
worked using a more limited sample of economies.
23See Online Annex 2.4 for a similar decomposition over the
period spanning the global financial crisis.
24Worker composition shifts during this period, particularly in
the US, where greater employment losses among low-wage workers
pushed average wages upward at the start of the pandemic, could
partly explain the differences.

WAGE DYNAMICS POST?COVID?19 AND WAGE?PRICE SPIRAL RISKS

contribution of the residual and other components in
both advanced and emerging market economies. On
average, the rise in inflation expectations appears to
account for more of the very latest movements in wage
growth.25 Chapter 1 provides evidence on how the
average and distribution of inflation expectations have
evolved in 2022 for selected economies.

Relative Contributions of Supply and Demand Shocks to
Wages and Prices
The large, unexplained movements in wage growth
observed during the COVID-19 shock and recovery
likely reflect the shock’s unprecedented and complex
nature, as well as the large policy responses. To help
unpack the breakdown of the wage Phillips curve
during the pandemic’s acute phase, this subsection
deploys a rich multi-economy, multisector general
equilibrium model featuring nominal rigidities and
credit constraints. Based on recent work by Baqaee
and Farhi (2022a, 2022b) and Gourinchas and others
(2021), the model facilitates the study of how different
demand and supply shocks propagate and contribute
to wage, price, and employment changes.
In total, seven types of shocks are considered,
all of which have been cited as being important
for understanding the COVID-19 shock and its
effects. On the supply side, the model includes three
types of shocks:
• Production capacity (or labor supply) shocks, arising
from lockdowns and social distancing, which had
a particularly large impact on labor supply: These
shocks are calibrated according to changes in the
number of hours worked by sector over time.
• International trade cost shocks, as measured by the
shipping costs by product for US imports: Freight
and insurance costs showed marked increases
starting in 2020.
• Commodity price changes for energy and food: Energy
and food prices went up by 85 percent and 20 percent year over year, respectively, in 2021.

25The prominence of tighter labor markets for higher wage growth
in the latest period appears greater when unemployment-to-vacancy
indicators—particularly for the case of the United States—are considered, as these indicators point to tighter labor markets than before
the pandemic. Alternative labor market slack measures co-moved
closely during the pandemic, but the degree of tightening relative
to the fourth quarter of 2019 varies for some economies (including
the US) depending on the measure used. See Online Annex 2.4
for details.

International Monetary Fund | October 2022

59

WORLD ECONOMIC OUTLOOK: COUNTERING THE COST?OF?LIVING CRISIS

The analysis also incorporates four types of
demand shocks:
• Changes in private saving behavior: These shocks are
calibrated by adjusting households’ discount rate to
track saving rates over time.
• Consumption composition changes: The pandemic led
to a large reallocation of consumption away from
services toward goods, driven by both availability
and preferences. Consumer taste shocks are derived
using changes in expenditure shares for different
types of goods and services over time.
• Fiscal policy support, which was substantial in many
advanced economies in 2020: This shock is derived
from changes in government consumption and
changes in spending on unemployment insurance.
• Monetary policy support, which was also extensive:
This shock is obtained by calibrating the domestic interest rate to that observed for central bank
policy rates.
A historical decomposition of key economic
variables—including wages and prices—for the
United States, euro area, and Mexico (an emerging
market economy) are presented for 2020 and 2021
(Figure 2.6).26
Wage Changes since 2019 Have Been More Related
to Supply-Side Shocks from the Pandemic, While
Demand-Side Shocks Have Contributed More to
Price Changes
Although all shocks contribute to the variation in
an economy, two main contributors emerge from the
results. First, reductions in production capacity (dark
red bars in Figure 2.6) were the predominant contributors to nominal wage changes during 2020 and 2021.
Second, changes in households’ saving behavior (dark
blue bars) were one of the most important drivers
of price changes over the same years. These findings
suggest that the future paths for these variables could
depend heavily on whether and how these shocks
unwind, as well as on whether new shocks arise.

26The impacts of individual shocks do not necessarily add up to
the total impact in combination because of interactions in general
equilibrium. It is also important to note that the total model-based
impacts by variable are broadly aligned, but not exactly equal to
actual outturns. The economies studied were selected based on a
combination of their economic size, availability of data required
for the model calibration (which is a constraint for many emerging
market and developing economies), and diversity of policy support responses.

60

International Monetary Fund | October 2022

Figure 2.6. Drivers of Changes in Wages, Prices, and
Employment during the COVID-19 Pandemic and Recovery
(Cumulative percent change, relative to pre–COVID-19 trend)
Reductions in production capacity and changes in households’ saving behavior
were the predominant contributors to wage and price changes during the
pandemic.
Total
Production capacity
Commodity prices
Trade costs

Private saving
Consumption composition
Fiscal support
Monetary support

25 1. United States
20
15
10
5
0
–5
–10
–15
–20

2020 2021
Nominal wage

2020 2021
In?ation

2020 2021
Real wage

2020 2021
Employment

2020 2021
In?ation

2020 2021
Real wage

2020 2021
Employment

2020 2021
In?ation

2020 2021
Real wage

2020 2021
Employment

10 2. Euro Area
5
0
–5
–10
–15

2020 2021
Nominal wage

25 3. Mexico
20
15
10
5
0
–5
–10
–15

2020 2021
Nominal wage

Source: IMF staff calculations.
Note: Nominal and real ages are de?ned on a er hour asis for the results
e hi ited in this ?gure Estimated impacts are calculated using a multi-sector,
multi-economy general equilibrium model based on Baqaee and Farhi (2020).
See Online Annex 2.5 for further details. The impacts of individual shocks do not
necessarily add up to the total impact in combination as a result of interactions in
general equilibrium. Total impacts are model-based and broadly aligned with
outturns.

CHAPTER 2

In 2020, the main determinant of wages and
employment across all three economies was the drop
in production capacity that took place early in the
pandemic (dark red bars). Lockdowns and the rise in
social distancing due to the pandemic translated into
decreases in production capacity and a lower labor
supply. These decreases led to a decline in employment
and an increase in hourly wages.
The second key driver in 2020, particularly for
prices, was the rise in private saving (dark blue
bars)—a contractionary force for aggregate demand—
due to the myriad uncertainties surrounding the pandemic and its consequences. This negative demand
shock had the usual disinflationary impact on nominal wages and consumer prices, particularly in the
United States. Finally, the expansive fiscal and monetary policy responses in the United States and the
euro area limited early damages to employment from
the pandemic and helped support nominal wages.27
In contrast, fiscal policy support in Mexico shrank in
2020, pulling wages and prices down to some extent
(yellow bars). Monetary policy expansion in Mexico
was effective at sustaining employment, along with
pushing nominal wages and prices up (light green
bars). For all three economies, the combination of
a sharp increase in nominal wages and muted price
responses led to strong increases in real wages.
In 2021, the main driver overall was the rebound
in aggregate demand running ahead of production
capacity—a supply-demand imbalance. The positive impact on consumer prices as private savings
began to be drawn down—a reversal of the negative
impact of higher savings in 2020—shows this most
clearly. Production capacity recovered somewhat last
year, especially in the euro area and Mexico, but
the recovery was not enough to fully boost employment as the cumulative impact was still negative.
Continued monetary accommodation in the United
States also pushed wages and prices up further. For
the euro area and Mexico, the inflationary effects of
monetary support were reduced. Fiscal policy support across economies decreased in 2021 compared
with 2020, relieving some of the earlier upward

27Note

that there are important aspects of the design and composition of fiscal support policies that the model abstracts away from.
See Chapter 3 of the April 2021 World Economic Outlook and the
October 2022 Fiscal Monitor for a discussion on how the appropriate
mix of job retention support and other measures may make fiscal
policy support more effective.

WAGE DYNAMICS POST?COVID?19 AND WAGE?PRICE SPIRAL RISKS

pressure on prices.28 The mix of nominal wage and
price changes led real wages to decline across the
board last year, especially in Mexico.
The other major contributor to wages and prices
in 2021 was the steep rise in commodity prices (dark
green bars). The euro area and Mexico felt the impacts
of those energy and food shocks on economy-wide
prices more strongly than the United States, but commodity price rises were a drag on employment across
the board. Commodity prices have risen even further
in 2022 (particularly with the shock of the Russian
invasion of Ukraine) and are pushing inflation up even
more. Wage and price prospects will depend in part on
how long these and other shocks persist.

Inflation De-anchoring: Expectations and
Policy Responses
Beyond the potential for more persistent and
additional inflationary demand and supply shocks, the
risks for inflation de-anchoring or the emergence of a
wage-price spiral will also depend on how businesses
and workers form their expectations for wages and
prices. This section delves into this issue. It first studies
empirically the dynamic responses of wages, prices,
and expectations about them to an inflationary shock
(driven by global supply pressures) and monetary
policy tightening.
Building on the insights from the empirical exercise,
the section then demonstrates how the dynamic effects
of inflationary shocks and the effectiveness of monetary policy responses depend critically on how wage
and price expectations are formed. Taking account of
current monetary policy plans, it considers a couple of
forward-looking scenarios under different assumptions
about the formation of wage and price expectations.
The findings suggest that more backward-looking
expectations will require stronger monetary policy responses to reduce the risks of de-anchoring,
but they also indicate that the risks of a wage-price
spiral are low.

28Fiscal

support likely had further, indirect inflationary effects
through its effects on private saving and labor supply as a result of
income transfers, but these channels are difficult to quantify precisely in the Baqaee and Farhi (2020) model used here. See Online
Annex 2.5 for further details. See Ramey (2016) for a summary
of the considerable empirical literature on the dynamic effects of
fiscal support.

International Monetary Fund | October 2022

61

WORLD ECONOMIC OUTLOOK: COUNTERING THE COST?OF?LIVING CRISIS

Inflationary Shocks and Monetary Tightening
The empirical analysis estimates the dynamic effects
of inflationary shocks and monetary tightening on
wages and prices using local projections. Inflationary shocks are proxied by the Federal Reserve Bank
of New York’s Global Supply Chain Pressure Index,
which captures the state of international supply chain
pressures and disruptions (which are highly relevant
to the current circumstances).29 The index can be
regarded as reflecting supply-side variation, since the
manufacturing data and transportation costs used in
its construction have been purged of demand factors.
Finally, to account for differences in economies’ exposures to global supply chain developments, the index is
interacted with trade openness by economy.30
For a one-standard-deviation increase in global
supply chain pressures, the inflation response outstrips
that of nominal wage growth (Figure 2.7, panels 1 and
6). Both realized and short-term expected inflation
increase persistently, taking three years (beyond the
horizon shown) before reverting to their long-term
means. In parallel, nominal wage growth increases
slightly in the very near term and then deteriorates
as the shock’s depressive effects on activity take hold.
Together, these dynamics engender a fall in real wage
growth (Figure 2.7, panel 5). Most important, there
are no signs that such inflationary shocks kick off a
wage-price spiral.31
29The estimation sample excludes the United States and includes a
set of small open advanced economies in the euro area to help avoid
the reverse causality and simultaneity concerns that would arise with
the inclusion of large economies, which could have sizable direct effects
on the global economy (given the inflationary shock considered).
Moreover, recent evidence suggests that changes in the index have had
a meaningful impact on inflation in euro area producer prices and
consumer goods prices (Akinci and others 2022). The sample comprises
16 economies: Austria, Belgium, Estonia, Finland, France, Germany,
Greece, Ireland, Italy, Latvia, Lithuania, The Netherlands, Portugal,
the Slovak Republic, Slovenia, and Spain. To avoid confusion with the
large number of shocks occurring with the COVID-19 pandemic, the
estimation sample ends in the fourth quarter of 2019. See Benigno and
others (2022a, 2022b) for details on the construction of the index.
30Trade openness is defined here as the sum of an economy’s
imports and exports as a share of GDP. To address concerns about
simultaneity, the estimation uses the lagged value of the supply chain
pressure index. See Online Annex 2.6 for further details on the
empirical specification and set of controls included.
31Behind the scenes, the long-term interest rate on government
bonds and the unemployment rate increase in response to such
a shock. These increases could reflect the effects of endogenous
monetary tightening in response to the adverse supply shock. See
Online Annex 2.6 for further details on the dynamic responses of
the long-term interest rate and the unemployment rate, along with a
more detailed discussion of the specification and robustness.

62

International Monetary Fund | October 2022

In contrast, monetary tightening brings inflation
down, with similar depressive effects on nominal
wage growth. To estimate the effects of monetary
policy tightening, the analysis uses the series of
identified European Central Bank monetary shocks
from Jarocinski and Karadi (2020).32 The impact of
a one-standard-deviation monetary tightening on
realized and expected inflation is shorter lived than the
effect of an inflationary supply chain shock (Figure 2.7,
panels 3 and 4). At the same time, nominal and real
wage growth decline, further helping mitigate any
inflationary pressures (Figure 2.7, panels 7 and 8). In
the background, the unemployment rate rises alongside
increases in the long-term rates on government debt.33
This empirical evidence suggests that supply-chainrelated inflationary shocks tend to have temporary effects
on inflation and wage growth and do not give rise to a
wage-price spiral. However, supply chain pressures do
appear to have a more prolonged effect on expected
inflation than monetary tightening. The differences in
dynamic effects may suggest that monetary policymakers
should respond aggressively to such shocks, particularly in
contexts like the current conjuncture, in which inflation
is high and rising and wage growth is sensitive to inflation
expectations (as shown earlier).
If inflation expectations become less anchored to
the monetary policy target rate, the effects on wages
and prices could change and increase the risks of a
persistent wage-price spiral emerging. When inflation
expectations are more anchored, they are comparatively
less sensitive to an inflationary shock from higher
global supply chain pressures, implicitly decreasing
the risk of future de-anchoring (Figure 2.8, red line
compared with blue line).34

32See Online Annex 2.6 for a detailed description of the analysis.
Note that the effect of monetary policy shocks could be seen as
lower-bound estimates since the effective lower bound may reduce
the variation in some of the overnight indexed swap rates used in the
construction of the shock.
33See Online Annex 2.6 for further details.
34The Global Supply Chain Pressure Index is interacted with a
dummy equal to one if the lagged economy’s strength of inflation
anchoring, proxied by the Bems and others’ (2021) index, is above
the cross-economy and cross-time median of the indicator. See Online
Annex 2.6 for details on the construction of the indicator. This result
is also in line with that of Carrière-Swallow and others (2022), who
find that increases in the Baltic Dry Index lead to larger inflationary
effects among economies with weaker monetary policy frameworks.
To better anchor expectations, the recent literature has emphasized the
role played by central banks’ communication strategies and guidance,
in addition to more traditional policy actions, such as interest rate
changes (Coibion, Gorodnichenko, and Weber 2022).

CHAPTER 2

WAGE DYNAMICS POST?COVID?19 AND WAGE?PRICE SPIRAL RISKS

Figure 2.7. Cumulative Effects of Supply Chain Pressures and Monetary Tightening on Wages and Prices
(Percentage points; dynamic response)
Increases in supply chain pressures tend to raise in?ation and depress wage growth, with more persistent effects on in?ation expectations. Monetary tightening is
effective at bringing both in?ation and in?ation expectations down, but the actions required to offset in?ationary shocks from supply chain pressures could be large.

Supply Chain Pressure
0.8 1. In?ation

0.4 2. In?ation Expectations

0.6

0.3

0.4

Monetary Policy Shock
3. In?ation

0.1

4. In?ation Expectations

0.1

0.0
0.0

0.2

0.2

–0.1
0.1

0.0

–0.1
–0.2

0.0

–0.2
–0.4
–1 0 1 2 3 4 5 6 7 8

–0.1
–1 0 1 2 3 4 5 6 7 8

0.5 5. Real Wage Growth

0.5 6. Nominal Wage Growth

0.0

0.0

–0.5

–0.5

–1.0

–1.0

–1.5

–1.5

–2.0
–1 0 1 2 3 4 5 6 7 8

–2.0
–1 0 1 2 3 4 5 6 7 8

–1 0 1 2 3 4 5 6 7 8
7. Real Wage Growth

–0.3

0.2

–1 0 1 2 3 4 5 6 7 8
8. Nominal Wage Growth

–0.2

0.2

0.0

0.0

–0.2

–0.2

–0.4

–0.4

–0.6
–1 0 1 2 3 4 5 6 7 8

–0.6
–1 0 1 2 3 4 5 6 7 8

Sources: Federal Reserve Bank of New York; Haver Analytics; Jaroci ski and Karadi (2020); Organisation for Economic Co-operation and Development; and IMF staff
calculations.
Note: Lines show the estimated impulse responses of the indicated variable to the indicated shock, with the shaded area representing the 90 percent con?dence
interval. The horizontal axes show time in quarters, where t = 0 is the initial impact quarter of the shock. The estimation sample includes euro area economies during
1999:Q4–2019:Q4. Panels 1, 2, 5, and 6 are the responses to a supply chain pressure shock, de?ned as a one-standard-deviation increase in the Federal Reserve
Bank of New York’s Global Supply Chain Pressure Index. To account for economies’ different degrees of exposure, the index is weighted by an economy’s trade
openness. Panels 3, 4, 7, and 8 are the responses to a one-standard-deviation monetary policy shock, as identi?ed in Jaroci ski and Karadi (2020). “In?ation
expectations” are 12-month-ahead expected in?ation. See Online Annex 2.1 for details on the sample and Online Annex 2.6 for further details on the estimation.

The Role of Expectations and Monetary Policy Responses
in Wage and Price Inflation
Central banks often discuss the importance of monitoring price expectations to assess the proper stance
of monetary policy, aiming to ensure that expectations
do not drift away from central bank targets. As the
world economy recovers from a global pandemic and
inflation reaches levels not seen in decades in many
economies, there are concerns about a break from
recent-past trends, with expectations changing sharply.
This subsection zooms in on how differences in the
expectations formation process can affect an economy’s
dynamics, with particular focus on the behavior of
nominal wages and prices.

The analysis estimates a small, standard dynamic
stochastic equilibrium model conditional on different
expectation formation processes, thereby isolating their
role in shaping the economy’s response to shocks and
policy actions. The model incorporates price and wage
Phillips curves (which relate price and wage inflation,
respectively, to expectations, the gap between real
wages and productivity, and slack in the economy),
an investment-savings curve (relating output to the
nominal interest rate and inflation expectations), and a
monetary policy reaction function.35
35See Online Annex 2.7 for more details about the model and its
structure. See also Alvarez and Dizioli (forthcoming).

International Monetary Fund | October 2022

63

WORLD ECONOMIC OUTLOOK: COUNTERING THE COST?OF?LIVING CRISIS

Figure 2.8. Cumulative Effects of Supply Chain Pressures on
In?ation Expectations
(Percentage points; dynamic response)
More anchored in?ation expectations respond less to supply chain pressures.
1.0

Less anchored

More anchored

0.8
0.6

How Wage and Price Expectations Form Matters
More the Farther Away Inflation and Inflation
Expectations Are from Target

0.4
0.2
0.0
–0.2
–0.4
–0.6
–1

3. Adaptive learning: Partway between rational expectations and fully adaptive expectations, adaptive
learning assumes that businesses and households
form expectations using small statistical models for
key variables such as wages and prices. They update
these expectations regularly as new data become
available, learning from their mistakes and adjusting
their expectations process.36

0

1

2

3

4

5

6

7

8

9

10

11

12

Sources: Bems and others (2021); Federal Reserve Bank of New York; Haver
Analytics; Organisation for Economic Co-operation and Development; and IMF staff
calculations.
Note: Lines show the estimated impulse responses of in?ation expectations
(12 months ahead) to a one-standard-deviation rise in the Federal Reserve Bank of
New York’s Global Supply Chain Pressure Index (weighted by an economy’s trade
openness), conditional on the strength of in?ation anchoring (de?ned by Bems and
others [2021] over a ?ve-year-ahead horizon). The red (blue) line is the response
for economies with in?ation anchoring above (below) the cross-economy median.
Lighter-shaded areas represent the 90 percent con?dence interval; darker-shaded
areas are the 68 percent con?dence intervals. The horizontal axis shows time in
quarters, where t = 0 is the initial impact quarter of the shock. The estimation
sample includes euro area economies during 1999:Q4–2019:Q4. See Online
Annex 2.1 for details on the sample and Online Annex 2.6 for further details on the
estimation.

With acknowledgment of the uncertainties surrounding expectations at the current juncture, three kinds of
expectations formation processes are considered:
1. Rational expectations: Standard in much economic
modeling because of the tractability of rational
expectations, businesses and households understand
the economy’s complete structure, including the
distribution of potential shocks. This means that
businesses and households make accurate forecasts
on average about future outcomes so that their
expectations about the future are correct in the
absence of further shocks.
2. Fully adaptive expectations: At the other extreme,
businesses and households have fully adaptive
expectations, which means they look at the value of
a variable only in the recent past and assume that it
will stay at that value in the future. Therefore, they
project future variables to be exactly equal to their
latest realization.
64

International Monetary Fund | October 2022

Estimating the model for the United States, a
scenario in which there are no new shocks to inflation
and interest rates are exogenously set according to the
Federal Reserve’s dot plot as of June 2022, a soft landing appears feasible if expectations for wages and prices
are rational (Figure 2.9, dashed lines).37 In this case,
the current inflationary shock is assumed to dissipate
smoothly over the subsequent 12 quarters, allowing
the output gap to converge smoothly to zero and core
inflation to come down to the Federal Reserve’s target
of 2 percent.
In contrast, if wage and price expectations are fully
adaptive, there is a fast near-term acceleration in wage
and price inflation because businesses and households
expect them to be identical to their most recent realizations, which have been higher than usual (Figure 2.9,
red lines). Moreover, the economy is still facing large
cost-push shocks that exacerbate price pressures and
mostly offset the near-term disinflationary effects of
falling real wages (since wage growth does not keep
up fully with price inflation). As shocks dissipate and
the real wage gap becomes even more negative, price
inflation quickly declines after five quarters. However, although inflation comes down and there are no
further future shocks assumed, price inflation remains
1.5 percentage points over target even 12 quarters later.
To bring inflation down more quickly under this type
of expectations formation, monetary policy would
need to tighten much more sharply than is currently
anticipated.

36See Online Annex 2.7 for further discussion of the alternative
expectations formation processes, including the specific functional
forms assumed for the adaptive learning process.
37The findings do not change in a meaningful way if monetary
policy instead follows the estimated monetary policy reaction function, pointing to a high degree of consistency between the reaction
function and announced policy. See Online Annex 2.7.

CHAPTER 2

Figure 2.9. Near-Term Scenarios with Set Interest Rate Path
under Different Expectations
(Percent)
With cost-push shocks originating outside the labor market, real wage dynamics
hel to sta ili e in?ation even hen age and rice e ectations are
ac ard-loo ing ada tive f olic actions are not suf?cientl res onsive
in?ation and in?ation e ectations can de-anchor from target the more ada tive
the expectations.
Adaptive learning baseline
Fully adaptive expectations
Rational expectations
11 1. In?ation

. In?ation

e tation

11

9

9

7

7

5

5

3

3

1
0

2

4

6

8

10

12

0

2

4

6

8

10

4. Real Wage Gap

9 3. Nominal Wage Growth

1
12
1

8

0

7

–1

6

–2

5

–3

4
0

2

4

6

8

10

12

0

4 5. Output Gap

2

4

6

8

10

6. Interest Rate

–4
12
4

3

3

2
2
1
1

0
–1
0

2

4

6

8

10

12

0

2

4

6

8

10

WAGE DYNAMICS POST?COVID?19 AND WAGE?PRICE SPIRAL RISKS

Under adaptive learning, which is the most realistic
of the three expectations processes since the process is
estimated to fit recent data on wage and price dynamics, the paths of inflation, wage growth, and the output
gap lie between those for rational and fully adaptive
expectations (Figure 2.9, blue lines). There is somewhat
greater inertia than with rational expectations, but
nowhere near the level seen in the fully adaptive case.38
Even so, while the output gap mostly closes, inflation
is still about half a percentage point above target after
12 quarters.
The results from simulations of the model estimated
for the case of Brazil—an emerging market economy—
exhibit broad patterns across the three expectations
processes that are similar to those for the United States
(see Online Annex 2.7). However, they show an even
greater sensitivity to inflationary shocks and higher
risks of de-anchoring in general. The greater sensitivity
could entail a stronger reaction from the central bank
to anchor expectations.
In all cases, the dynamics of real wages are critical
to the evolution of wage and price inflation since they
can affect price pressures. For simplicity, wages are
the only determinant of marginal costs in the model
employed here. Because of this, the model can also
illustrate the likelihood of a wage-price spiral dynamic
taking hold. This modeling choice not only allows the
assessment of the likelihood of wage-price spirals in
the simulated scenarios but also shows that wages can
be an important anchor to inflation when cost-push
shocks hit an economy. When inflationary cost-push
shocks occur, the negative real wage gap characterizing
the current circumstances helps anchor inflation, even
in the case of fully adaptive expectations.39 When the
real costs of labor fall, they help bring inflation down.
Moreover, the larger the increase in inflation, the more
negative the real wage gap becomes and the more
powerful this anchoring mechanism is. Using a different methodology and focusing on the United States,
Box 2.1 empirically examines the feedback from wages

0
12

Source: IMF staff calculations.
Note: The responses illustrate scenarios calibrated to the United States, assuming
that the in?ationar shoc s as of earl 2022 dissi ate as estimated ased on
revious e erience n?ation is core in?ation he hori ontal a es sho time in
quarters since 2021:Q4. See Online Annex 2.7 for further details on the structure
and estimation of the underlying small dynamic stochastic general equilibrium
model.

38The model is estimated over a period in which the monetary
policy framework had high credibility, and hence the adaptive
learning process begins centered on the inflation target, similar to
the anchoring that occurs with rational expectations. Consequently,
a very large shift in how expectations are formed would be needed to
push the adaptive learning scenario to approximate the fully adaptive
case. The greater economic inertia seen in the adaptive learning case
is a function of the greater inertia in expectations.
39A negative real wage gap means that the real wage (the ratio of
the wage to the price level) has not kept up with labor productivity.

International Monetary Fund | October 2022

65

WORLD ECONOMIC OUTLOOK: COUNTERING THE COST?OF?LIVING CRISIS

Figure 2.10. Optimal Policy Scenario under Adaptive
Learning Expectations
(Percent)
Front-loading monetary policy tightening is optimal to lessen the buildup of
in?ation expectations, helping to achieve target more quickly and smoothly.
Adaptive learning baseline
6 1. In?ation

Optimal policy
6

2. In?ation Expectation

5

5

4

4

3

3

2

2

1

1

0
0

2

4

6

8

10

12

0

5.4 3. Nominal Wage Growth

2

4

6

8

10

4. Real Wage Gap

0
12
1.0
0.5

5.2

0.0
5.0
–0.5
4.8
4.6
0

–1.0

2

4

6

8

10

12

0

4 5. Output Gap

2

4

6

8

–1.5
12

10

6. Interest Rate

4

3

3

2
2
1
1

0
–1
0

2

4

6

8

10

12

0

2

4

6

8

10

0
12

Source: IMF staff calculations.
Note: The responses illustrate scenarios calibrated to the United States, assuming
that the in?ationary shocks as of early 2022 dissipate as estimated based on
previous experience. n?ation is core in?ation The horizontal axes show time in
quarters since 2021:Q4. Optimal policy is determined using an objective function
that equally weights output and in?ation deviations from potential and target,
respectively, with some weight given also to policy rate smoothing. See Online
Annex 2.7 for further details on the structure and estimation of the underlying
small dynamic stochastic general equilibrium model.

66

International Monetary Fund | October 2022

to prices by sector and finds only limited pass-through
from wage-cost shocks to prices.
As alluded to earlier, more backward-looking
expectations will typically require a faster and stronger monetary tightening in response to an inflationary shock. But how much faster? For the case of the
United States, with a positive output gap and persistent cost-push shocks, if expectations are formed
through adaptive learning, a central bank that minimizes a standard welfare function would choose to
initially tighten policy more and start easing earlier
than the path implied by the Federal Reserve’s dot plot
as of June 2022 (Figure 2.10).40 Even so, it would take
several quarters for inflation to come down, although
the inflation gains would accumulate over time. Monetary policy affects inflation dynamics through three
channels: (1) higher interest rates lower the output gap
and real wages through the wage and price Phillips
curves; (2) as expectations are partially adaptive, lower
inflation realizations contribute to lower expected
inflation; and (3) through recognizing mistakes in their
forecasts, businesses and households learn over time
and place less importance on past outcomes when it
comes to their expectations.

Conclusions
Many economies have seen sharp rises in price
inflation since 2021 as adverse supply shocks buffet the
global economy and labor markets appear tight in the
wake of the acute COVID-19 shock. These inflation
rises have raised concerns among some observers that
prices and wages could start feeding off each other
and accelerate, leading to a wage-price spiral dynamic.
Using a mix of empirical and model-based analyses,
this chapter has examined recent developments, trying
to shed light on the prospects for wages and the
chances that a wage-price spiral could emerge.
Although wage and price inflation picked up in a
broad-based manner through 2021, real wages tended
to be flat or falling across economies on average. This is
an important aspect of the current conjuncture, since
falling real wages can be disinflationary by lowering
40The determination of an optimal monetary policy response
depends on the following assumptions: (1) the central bank minimizes a welfare function that equally weighs output and inflation
deviations (a quadratic loss function) and (2) the central bank knows
the expectations formation process and has full information on
future cost-push shocks. See Online Annex 2.7 for more details on
the exercise.

CHAPTER 2

firms’ real costs. An analysis of historical episodes with
features similar to today’s suggests that these episodes
did not tend to be followed by a wage-price spiral. In
fact, inflation tended to fall gradually afterward on
average, and nominal wages gradually caught up over
several quarters. However, in some cases, inflation
remained elevated for a while.
Wage dynamics during 2020 and into early 2021
are poorly explained by inflation expectations and
labor market slack, likely reflecting the highly unusual
constellation of shocks arising with the COVID-19
pandemic. Model-based analysis of 2020–21 wages
and prices suggests disparate underlying shocks: wages
were driven predominantly by production capacity
and labor supply shocks, while private saving was
important for price changes. That said, in the second
half of 2021, wage growth appears to be relatively
well explained by inflation expectations and labor

WAGE DYNAMICS POST?COVID?19 AND WAGE?PRICE SPIRAL RISKS

market slack on average, potentially pointing to a
gradual shift toward more normal economic dynamics.
Of course, this shift is highly contingent on whether
the earlier shocks continue unwinding and whether
new shocks arise.
Finally, the analysis suggests a critical role for the
expectations formation process in shaping wage and
price prospects. When wage and price expectations are
more backward-looking, monetary policy actions need
to be more front-loaded to minimize the risks of inflation de-anchoring. As monetary policy tightens more
aggressively and the decline in real wages helps reduce
price pressures, according to the scenario analysis, the
risk of a persistent wage-price spiral emerging in the current episode is contained on average, assuming no more
persistent inflationary shocks or structural changes in
wage- and price-setting processes (such as sharply higher
pass-through from prices to wages or vice versa).

International Monetary Fund | October 2022

67

WORLD ECONOMIC OUTLOOK: COUNTERING THE COST?OF?LIVING CRISIS

Box 2.1. Pass-Through from Wages to Prices: Estimates from the United States
The empirical literature offers limited evidence on
the pass-through of wages to consumer prices. At the
macroeconomic level, the link between labor cost
and price inflation has weakened over the past three
decades.1 Meanwhile, analysis at a more disaggregated
level has not reached much of a consensus on the
pass-through of labor costs to retail prices.2
Using a novel estimation approach, this box finds
that the recent pickup in nominal wage growth has
added only modestly to consumer price inflation,
mostly through its effects on prices of certain services.
The analysis studies the pass-through of labor costs
to consumer prices (as measured by the personal consumption expenditure, or PCE, price index) by looking at disaggregated sectoral data. The main empirical
challenge is that consumer prices, which reflect the
final product of multiple production processes, cannot
be readily matched to the costs of labor inputs, which
are recorded at the industry level. To overcome this
measurement problem, input-output matrices are
used to construct the cumulative costs of labor inputs
(traced through the supply chain of intermediate
goods and services) for 73 subcomponents of the PCE
index. Using the local projection method in Heise,
Karahan, and Sahin (2020), with sectoral productivity
growth and time and industry fixed effects controlled
for, the impulse response of prices to wage changes
shows a pass-through of about 10 percent to services
after five quarters, but no measurable pass-through to
goods prices (Figure 2.1.1). The lack of pass-through
in goods compared with that in services could be due
to firms absorbing more labor cost changes, on the
back of higher market power and import penetration. The estimated pass-through appears materially
unchanged from the mid-2000s up to the pandemic.
There is some tentative evidence that the
pass-through from wages to service prices is stronger during periods or in sectors in which labor costs
increased more quickly. Pre-2020 data suggest that
contemporaneous pass-through in the services sector
The authors of this box are Moya Chin and Li Lin.
Bobeica, Ciccarelli, and Vansteenkiste (2021) for evidence
on this.
2For further background on the debate, see Rissman (1995)
and Heise, Karahan, and Sahin (2021), among others.
1See

68

International Monetary Fund | October 2022

Figure 2.1.1. Pass-Through from Wages to
Prices
(Percent)
0.3 1. Goods
0.2
0.1
0.0
–0.1
–0.2
–0.3
–0.4

0

1

2

3

4

5 6 7
Quarters

8

9 10 11 12

4

5 6 7
Quarters

8

9 10 11 12

0.3 2. Services
0.2
0.1
0.0
–0.1
–0.2

0

1

2

3

Sources: US Bureau of Economic Analysis; US Bureau of
Labor Statistics; and IMF staff calculations.
Note: Lines show the dynamic pass-through from a 1
percentage point change in current wage growth (at t = 0,
measured by the four-quarter change in wages) to in?ation
(measured by the four-quarter change in the indicated
sectoral prices). Shaded areas show the 90 percent
con?dence interval.

picks up to 20 percent (and is statistically significant
at the 99 percent confidence level) when wage growth
is at or above the 75th percentile (that is, 3.9 percent),
while pass-through is about zero in periods with lower
wage growth. In addition, the cross section from the
sectoral data suggests that the point estimate of the
pass-through from wages to service prices has been
increasing since the first quarter of 2021 but is not
statistically significant.

CHAPTER 2

References
Akinci, Ozge, Gianluca Benigno, Ruth Cesar Heymann, Julian
di Giovanni, Jan J. J. Groen, Lawrence Lin, and Adam I.
Noble. 2022. “The Global Supply Side of Inflationary Pressures.” Liberty Street Economics (blog), January 28, 2022.
Alvarez, Jorge, John Bluedorn, Niels-Jakob Hansen, Youyou
Huang, Evgenia Pugacheva, and Alexandre Sollaci. Forthcoming. “Wage-Price Spirals: What Is the Historical Evidence?” IMF Working Paper, International Monetary Fund,
Washington, DC.
Alvarez, Jorge, and Allan Dizioli. Forthcoming. “How Costly
Will Reining in Inflation Be? It Depends on How Rational
We Are.” IMF Working Paper, International Monetary Fund,
Washington, DC.
Baba, Chikako, and Jaewoo Lee. 2022. “Second-Round Effects
of Oil Price Shocks—Implications for Europe’s Inflation Outlook.” IMF Working Paper 22/173, International Monetary
Fund, Washington, DC.
Ball, Laurence M., Daniel Leigh, and Prachi Mishra. Forthcoming. “Understanding U.S. Inflation during the COVID-19
Era.” IMF Working Paper, International Monetary Fund,
Washington, DC.
Ball, Laurence M., Daniel Leigh, Prachi Mishra, and
Antonio Spilimbergo. 2021. “Measuring U.S. Core
Inflation: The Stress Test of COVID-19.” NBER Working
Paper 29609, National Bureau of Economic Research,
Cambridge, MA.
Baqaee, David, and Emmanuel Farhi. 2022. “Networks, Barriers,
and Trade.” NBER Working Paper 26108, National Bureau
of Economic Research, Cambridge, MA.
Baqaee, David, and Emmanuel Farhi. 2020. “Supply and
Demand in Disaggregated Keynesian Economies with an
Application to the COVID-19 Crisis.” American Economic
Review 112 (5): 1397–436.
Battistini, Niccolò, Helen Grapow, Elke Hahn, and Michel
Soudan. 2022. “Wage Share Dynamics and Second-Round
Effects on Inflation after Energy Price Surges in the 1970s
and Today.” ECB Economic Bulletin 5.
Bems, Rudolfs, Francesca Caselli, Francesco Grigoli, and Bertrand
Gruss. 2021. “Expectations’ Anchoring and Inflation Persistence.” Journal of International Economics 132: 103516.
Benigno, Gianluca, Julian di Giovanni, Jan J. J. Groen, and
Adam I. Noble. 2022a. “The GSCPI: A New Barometer
of Global Supply Chain Pressures.” Liberty Street Economics
(blog), January 4, 2022.
Benigno, Gianluca, Julian di Giovanni, Jan J. J. Groen, and
Adam I. Noble. 2022b. “Global Supply Chain Pressure
Index: March 2022 Update.” Liberty Street Economics
(blog), March 3, 2022.
Bluedorn, John, Francesca Caselli, Niels-Jakob Hansen, Ippei
Shibata, and Marina M. Tavares. 2021. “Gender and
Employment in the COVID-19 Recession: Evidence on
‘She-cessions.’” IMF Working Paper 21/95, International
Monetary Fund, Washington, DC.

WAGE DYNAMICS POST?COVID?19 AND WAGE?PRICE SPIRAL RISKS

Bobeica, Elena, Matteo Ciccarelli, and Isabel Vansteenkiste.
2021. “The Changing Link between Labor Cost and Price
Inflation in the United States.” Working Paper Series 2583,
European Central Bank, Frankfurt, Germany.
Boissay, Frederic, Fiorella De Fiore, Deniz Igan, Albert
Pierres-Tejada, and Daniel Rees. 2022. “Are Major Advanced
Economies on the Verge of a Wage-Price Spiral?” BIS Bulletin
53, Bank for International Settlements, Basel.
Caplan, Benjamin. 1956. “A Case Study: The 1948–1949 Recession.” In Policies to Combat Depression, edited by UniversitiesNational Bureau Committee for Economic Research, 27–58.
Cambridge, MA: National Bureau of Economic Research.
Carrière-Swallow, Yan, Pragyan Deb, Davide Furceri, Daniel
Jiménez, and Jonathan D. Ostry. 2022. “Shipping Costs and
Inflation.” IMF Working Paper 22/61, International Monetary Fund, Washington, DC.
Coibion, Olivier, Yuriy Gorodnichenko, and Michael Weber.
2022. “Monetary Policy Communications and Their Effects
on Household Inflation Expectations.” Journal of Political
Economy 130 (6): 1537–84.
Duval, Romain, Yi Ji, Longji Li, Myrto Oikonomou, Carlo
Pizzinelli, Ippei Shibata, Alessandra Sozzi, and Marina M.
Tavares. 2022. “Labor Market Tightness in Advanced Economies.” IMF Staff Discussion Note 2022/001, International
Monetary Fund, Washington, DC.
Galí, Jordi. 2011. “The Return of the Wage Phillips Curve.”
Journal of the European Economic Association 9 (3): 436–61.
Gourinchas, Pierre-Olivier, S·ebnem Kalemli-Özcan, Veronika
Penciakova, and Nick Sander. 2021. “Fiscal Policy in the
Age of COVID: Does It ‘Get in All of the Cracks?’” NBER
Working Paper 29293, National Bureau of Economic
Research, Cambridge, MA.
Hazell, Jonathon, Juan Herreño, Emi Nakamura, and Jón Steinsson.
2022. “The Slope of the Phillips Curve: Evidence from U.S.
States.” The Quarterly Journal of Economics, 137 (3): 1299–344.
Heise, Sebastian, Fatih Karahan, and Aysegül Sahin. 2020.
“The Missing Inflation Puzzle: The Role of the Wage-Price
Pass-Through.” Journal of Money, Credit and Banking 54
(Suppl. 1): 7–51.
International Labour Organization (ILO). 2022. World Employment and Social Outlook: Trends 2022. Geneva, Switzerland:
ILO Publications.
Jarocinski, Marek, and Peter Karadi. 2020. “Deconstructing
Monetary Policy Surprises—The Role of Information Shocks.”
American Economic Journal: Macroeconomics 12 (2): 1–43.
Ramey, Valerie A. 2016. “Macroeconomic Shocks and Their
Propagation.” In Handbook of Macroeconomics, vol. 2A, edited
by John B. Taylor and Harald Uhlig, 71–162. Amsterdam:
Elsevier.
Rissman, Ellen R. 1995. “Sectoral Wage Growth and Inflation.”
Economic Perspectives 19 (4): 16–28.
Rouse, Cecilia, Jeffery Zhang, and Ernie Tedeschi. 2021. “Historical Parallels to Today’s Inflationary Episode.” Blog post,
United States White House, July 6, 2021.

International Monetary Fund | October 2022

69

CHAPTER

3

NEAR?TERM MACROECONOMIC IMPACT OF DECARBONIZATION POLICIES

Decades of procrastination have transformed what could
have been a smooth transition to a more carbon-neutral
society into what will likely be a more challenging one.
By the end of the decade, the global economy needs to
emit 25 percent less greenhouse gases than in 2022 to
have a fighting chance to reach the goals set in Paris
in 2015 and avert catastrophic climate disruptions.
Because the energy transition needed to accomplish
this has to be rapid, it is bound to involve some costs
in the next few years. While there is little consensus on
the expected near-term macroeconomic consequences of
climate change policies, this chapter’s central message
is that if the right measures are implemented immediately and phased in gradually over the next eight years,
the costs will remain manageable and are dwarfed by
the innumerable long-term costs of inaction. Different
assumptions regarding the speed at which electricity
generation can transition toward low-carbon technologies
put these costs somewhere between 0.15 and 0.25 percentage point of GDP growth and an additional 0.1 to
0.4 percentage point of inflation a year with respect to
the baseline, if budget-neutral policies are assumed. To
avoid amplifying these costs, it is important that both
climate and monetary policies be credible. Stop-and-go
policies and further procrastinating on the grounds that
“now is not the time” will only exacerbate the toll.

Introduction
The scientific consensus recently summarized by
the Intergovernmental Panel on Climate Change
(IPCC 2022) suggests that to limit catastrophic
climate disruptions, large-scale policy changes need
to take place rapidly. Decades of procrastination have
transformed what could have been a slow transition
to a carbon-neutral society into what will now have
The authors of this chapter are Mehdi Benatiya Andaloussi,
Benjamin Carton (co-lead), Christopher Evans, Florence Jaumotte,
Dirk Muir, Jean-Marc Natal (co-lead), Augustus J. Panton, and
Simon Voigts, with support from Carlos Morales, Cynthia Nyakeri,
and Yiyuan Qi. They thank Jean Pisani-Ferry for helpful comments
on an earlier draft.

to be a more abrupt one. To have a fighting chance
to reach the 2015 Paris Agreement’s goal of limiting
global warming (relative to the preindustrial age) to
well below 2°C, and preferably 1.5°C, and to achieve
net carbon neutrality by 2050 requires immediate and
ambitious action. By 2030, global emissions have to be
reduced by at least 25 percent compared with today’s
emissions, which would require a combination of a
sustained and large increase in greenhouse gas (GHG)
emission taxes, regulations on emissions, and large
investment in low-carbon technologies.1 Advanced
economies cannot accomplish the needed reduction
alone; large emitters in emerging markets also have to
step up the pace of their emission reduction activities
(Parry, Black, and Roaf 2021).
Concerns about the energy transition’s real
economic costs have been a key determinant of
decades-long procrastination on the policy front; while
costs are often perceived as clear and present, benefits
are seen as distant and uncertain, despite overwhelming evidence that any short-term costs will be dwarfed
by the long-term benefits (with respect to output,
financial stability, health) of arresting climate change
(October 2020 World Economic Outlook; IPCC 2022).
And hesitation in implementing the necessary climate
mitigation policies seems to have even grown recently
against a backdrop of rising commodity prices fueling
inflation (Morawiecki 2022) and worries about energy
security (see Chapter 1). In some circles, concerns
have been raised that fighting climate change could
cause a global inflation shock (Morison 2021), exacerbating the output-inflation trade-offs central banks
currently face and increasing risks to medium-term
price stability (Schnabel 2022). But are these concerns warranted?
1See Black and others (2022) and Chateau, Jaumotte, and
Schwerhoff (2022a) for an analysis of the equivalence between
regulation on emissions and carbon taxes. Note that while incentives for investment in green technology and renewables are an
important part of any climate package, they are best supplemented
by carbon taxes or equivalent regulations that will help decrease
demand for fossil fuels and achieve a faster transition.

International Monetary Fund | October 2022

71

WORLD ECONOMIC OUTLOOK: COUNTERING THE COST?OF?LIVING CRISIS

There is little consensus on the expected
near-term macroeconomic consequences of climate
change mitigation policies, such as GHG taxes. At
the most fundamental level, imposing GHG taxes
amounts to putting a price on a resource—the
right to pollute—that used to be free. Internalizing
this negative externality increases the cost of fossil
fuels—an adverse supply shock—which on the surface bears many similarities to a standard oil price
shock (Pisani-Ferry 2021). But the economics of climate policy and fossil fuel price shocks have important differences. First and foremost, GHG taxes lead
to lower (net-of-tax) prices for fossil fuel producers,
an important deterrent to investment in this kind of
energy source. Second, while fossil fuel price shocks
entail a transfer of revenues to fossil fuel exporters,
GHG taxes generate fiscal revenues that can be allocated in many different ways to partly alleviate their
negative effect on consumption and production and
to compensate low-income households, which an
increase in energy prices affects the most. Depending on how these revenues are used, they can have
vastly different effects on the economy. Third, while
fossil fuel price shocks are usually temporary and
sudden adverse supply shocks, GHG taxes are meant
to be permanent and assumed to be implemented
gradually (October 2020 World Economic Outlook,
Chapter 3). Forward-looking firms and households
will understand that future output and income will
be durably lower than previously expected and will
want to scale down investment and consumption;
the balance of supply and demand effects and the
net effect on output will depend greatly on other
policies governments undertake. Fourth, fossil fuel
price surges that do not alter relative prices according to the fuel’s carbon content (those that do not
increase coal prices more than gasoline prices, for
example) do not provide incentives for emission
reduction to the same extent as a carbon tax, in
particular when the surges are expected to be temporary. Also, considerable uncertainty surrounds the
pace at which electricity generation could transition
to low-carbon technologies. And as this chapter
shows, this has important implications for the
energy transition’s macroeconomic costs.
This chapter employs the IMF’s novel Global
Macroeconomic Model for the Energy Transition
(GMMET) to inform the current policy debate.
It voluntarily abstracts from issues related to

72

International Monetary Fund | October 2022

long-term costs and benefits of climate policies—
largely covered elsewhere2—and focuses on
near-term macroeconomic costs borne by agents whose
horizon is limited. The focus is also on budget-neutral
climate policies exclusively.3 This strategy makes it
possible to clearly disentangle the individual impacts
of climate and fiscal policies on GDP and inflation.
Moreover, in the current context of high public debt,
high inflation, and rising interest rates, a strong case
can be made to avoid further debt-financed demand
stimulation (Chapter 1).
This chapter aims to illustrate the effect of feasible
climate policies that balance the need to limit output
losses against the inflationary effects of higher taxes,
while ensuring low-income households do not bear
a disproportionate share of any costs the transition
entails.4
Given that the resulting output-inflation trade-offs
could vary a great deal depending on the design and
credibility of those policies, and in particular their
interaction with fiscal and monetary policy and the
pace at which electricity production can be decarbonized, this chapter puts a great deal of emphasis on
robustness. By shedding light on the range of possible
outcomes the required transition implies over the
next eight years, it will help policymakers quantify
alternative options and better tailor policies to their
individual situations.

2See Acemoglu and others (2012) and the October 2020
World Economic Outlook, Chapter 3, for a comprehensive discussion.
3The assumption of budget neutrality is in contrast to that in
Chapter 3 of the October 2020 World Economic Outlook, which
studies the effect of deficit-financed public investment on green
infrastructure investment. In the context of depressed economic
activity related to the COVID-19 pandemic, a fiscal stimulus was
the right policy; the proposed policy mix—carbon tax and public
investment—led to fiscal deficit and temporarily boosted GDP
(October 2020 World Economic Outlook, Figure 3.6). However, in
the current context of high inflation and rising interest rates, fiscal
policy should avoid undermining monetary policy’s efforts to tame
inflation and further build up public debt.
4Complementing the analysis in the October 2020 WEO—where
the impact of direct public investment in low-carbon technology
and infrastructure was analyzed—this chapter looks at the impact
of cost-effective subsidies for investment in renewables. This
modeling choice makes it possible to target sectors that already
have low-emission technologies, that is, renewables-based, nuclear,
and hydroelectric production and electric transportation. To some
extent, the difference between public investment and subsidies is a
semantic issue, as these sectors are fully or partly in public hands in
many countries.

CHAPTER 3

More specifically, this chapter tackles the following
questions:
• Energy transition and macroeconomic costs: How fast
could countries transition toward renewable sources
of energy? What would be the costs, if any, to
households and firms?
• Credibility and design of climate policies: How do
alternative policy packages fare in terms of their
effects on employment, investment, consumption
and output growth, inflation, and income distribution? What does a lack of policy credibility imply?
• Challenges for monetary policy: How great is the
output-inflation trade-off arising from higher GHG
taxes? How great is it likely to be if central banks
lose credibility or never had it in the first place?
• Macroeconomic cost of procrastination: Is delaying
GHG emission reduction policies a preferable
option in light of the current inflation environment?
Can starting later and doing it faster achieve the
same emission reductions? How great would the
costs be in terms of output lost and inflation?
Answers to these questions can be summarized as
follows:
• The energy transition will entail some costs, but they
should remain manageable if countries do not delay.
The speed at which countries are assumed to be able
to wean themselves off fossil fuels for electricity generation plays a key role in explaining the near-term
macroeconomic costs associated with the energy
transition. The more difficult it is to produce clean
electricity, the more costly it will be to transition,
as higher GHG taxes (or tighter regulations) will be
needed to trigger the necessary drop in the use of
carbon-intensive goods and services in the rest of the
economy. Costs will also be variable across regions,
with the block (in the model employed in this chapter) representing the rest of the world (dominated by
fossil fuel exporters and carbon-intensive economies) seeing the largest transition costs (see Online
Annex 3.3 for an analysis of costs when alternative
policies are envisioned for these countries). To reflect
the uncertainty surrounding the energy transition,
this chapter considers two alternative calibrations
for the elasticity of substitution between renewables
and fossil fuels in electricity generation. In the most
pessimistic case, a sharper increase in GHG taxes
(about twice as large as in the benchmark case) will
be necessary to reach the same decarbonization goal.

NEAR?TERM MACROECONOMIC IMPACT OF DECARBONIZATION POLICIES

While still manageable, the energy transition’s macroeconomic costs—measured in terms of lost output
and higher inflation—are expected to be about twice
as large and will crucially depend on policy design.
Cognizant of this uncertainty, this chapter estimates
global growth could be lower by 0.15 to 0.25 percentage point annually and inflation could be 0.1 to
0.4 percentage point higher. For China, Europe, and
the United States, GDP growth costs are expected to
be lower and in a range between 0.05 and 0.20 percentage point annually.
• Policy design has a major influence on climate policy’s
final impact on output, inflation, and income distribution. All policy packages are assumed to be financed
by GHG taxation only. Using the receipts of GHG
taxes to cut labor income taxes reduces distortions and
leads to relatively higher labor supply; higher wages
net of tax; and higher consumption, investment,
and output. Recycling part of the GHG tax receipts
into subsidies for investment in low-carbon technologies (renewables, nuclear and hydroelectric, electric
vehicles) facilitates the transition. The same decarbonization level can be achieved with lower GHG taxes
thanks to investment in carbon-neutral technology.
The impact on inflation is accordingly smaller, which
reduces the potential trade-offs for monetary policy.
Transferring tax revenues to low-income households
helps increase the acceptance of climate policies but
comes at a cost in terms of output growth.
• Climate policies have a limited impact on output and
inflation and thus do not present a significant challenge
for central banks. Gradual and credible implementation gives agents motive and time to transition
toward a low-emission economy. Induced mild
inflationary pressures require some monetary policy
adjustments to ensure expectations remain anchored,
but at minimal GDP costs. There may even be some
room to ease in the near term to facilitate the transition. In this respect, climate policies contrast greatly
with supply shocks, in which the sudden increase in
the energy price creates an immediate challenge for
monetary authorities. Less credible climate policies
require sharper adjustments down the road and generate more inflationary pressures and more challenges
for monetary authorities. Larger costs materialize only
with eroded monetary policy credibility, as inflationary pressures call for more policy response.
• Further delay would only amplify any costs associated
with the energy transition. Concerns about inflation

International Monetary Fund | October 2022

73

WORLD ECONOMIC OUTLOOK: COUNTERING THE COST?OF?LIVING CRISIS

and energy security have prompted some to suggest
that decarbonization should wait until current
inflationary pressures have been overcome. But this
would only amplify transition costs. This chapter’s
analysis shows that further delay would require
GHG taxes to be raised by even more and faster
than in the gradual scenario, with much larger costs
(the resulting inflationary impulse is about three
times stronger, and preventing it would require sacrificing roughly 1 percent of GDP over the course of
four years).
This chapter starts with a general survey, stressing the
urgency of cutting GHG emissions by 2030 at least to
an extent that is compatible with limiting warming at
the end of the century to well below 2°C. It then introduces the analytical apparatus by illustrating the impact
on growth and inflation of increasing GHG taxes
gradually. The next section discusses the importance of
credibility and complementarity between climate and
monetary policy for a successful transition. The last section quantifies the macroeconomic costs of further delay
and stresses that now is the time to act.

Decarbonizing the Economy: Now Is the Time to
Become Credible
Lay of the Land
The Paris Agreement enshrined the goal of 193 countries to limit global warming by the end of the century
to well below 2°C and preferably to below 1.5°C. So far,
countries have collectively failed to honor their pledges,
and the relentless rise in emissions following the agreement has made achieving the 1.5°C target extremely
difficult. Temperatures are set to rise further, and the
adverse consequences are understood to be nonlinear;
every increment of warming raises the risk of crossing
“tipping points” that would push the global climate
system into abrupt and irreversible changes (Lenton and
others 2019).5
Limiting global warming to below 2°C requires that
emissions decline by 25 percent relative to current
levels by 2030, which would mean an unprecedented
acceleration in mitigation efforts, but one that is
crucial to limit the extent of damage to the Earth’s
5Some

tipping points amplify global warming itself; for example,
GHGs released by thawing permafrost or the vanishing of ice sheets,
which help reflect solar heat.

74

International Monetary Fund | October 2022

Figure 3.1. Historical and Projected Global Emissions
(Gigatons a year)
Total projected emissions in 2030 are greater than emissions compatible with the
2°C goal.
100

Observed
Ambition gap
Implementation gap
Consistent with 2°C goal

75

50

25

0

2019

2030 (forecast)

Source: Intergovernmental Panel on Climate Change.
Note: The overhang of projected emissions in 2030 over the amount compatible
with 2°C warming consists of the ambition gap (the amount by which pledged
emissions exceed the 2°C-compatible amount) and the implementation gap
(emissions pledged to be avoided but forecast to arise under current policies).

climate system. Unfortunately, such a regime change
in climate policy remains elusive in almost all countries (UNEP and UNEP-CCC 2021; IPCC 2022;
Black and others 2021). The IPCC projects that under
policies currently in place, emissions in 2030 will be
more than 42 percent higher than those required to
reach the Paris Agreement target (Figure 3.1). Not
only are existing policy pledges insufficiently ambitious (the “ambition gap” in the figure), but they are
also projected to be missed under current policies (the
“implementation gap”). While pledges are more ambitious among advanced economies than among countries in other economic groups, climate goals can be
achieved only through a global effort (October 2020
World Economic Outlook, Chapter 3).

Enhancing Credibility of Climate Policy for More
Effectiveness
Lack of ambition and failing implementation characterize the history of climate policy, which allows parallels to be drawn with other areas of public policy. For
example, Kydland and Prescott (1977) demonstrate
how central bankers concerned about inflation as well
as short-term unemployment form time-inconsistent
monetary policies that lead to higher inflation with no

CHAPTER 3

gains in employment. Similarly, governments announce
carbon-reducing policies but have incentives to renege
on them to try to maximize output or employment
or safeguard particular interests (Brulle 2018) during
their terms.
With investment and research and development
decisions based on long planning horizons, it is key
that (to affect behaviors) new climate policy measures
and commitments to future carbon-reducing policies
(for example, increments in GHG taxes, regulations,
and subsidies) be perceived as credible and irreversible (see “Credible Policies: Key for a Successful
Transition”). As is the case for monetary policy, the
credibility—and thereby effectiveness—of climate
policy will be enhanced if (1) there is a clearly defined
rules-based commitment rather than pure discretion on
how future decarbonization targets will be achieved,
(2) instruments and analysis of policies to reach such
targets are transparent, and (3) the targets are implemented independently, insulated from the political
process (Nemet and others 2017). Ideally, the third
criterion would involve an institutional arrangement
akin to central banks’ mandates to pursue price stability as their primary goal, along with operational independence, granted by law. However, this is still a high
bar, even in countries with the most advanced climate
mitigation policies (such as Denmark and Sweden). To
overcome the absence of institutional independence,
some countries have taken explicit account of political
economy constraints when designing climate policies.
For instance, because the impact of GHG taxes tends
to fall disproportionately on the poor in many countries, it is important to carve out some transfers for
the poor from GHG tax revenues to amplify support
for GHG tax policy; widespread acceptance greatly
increases credibility. Pragmatic policy design may then
have to sacrifice some efficiency (usually achieved by
cutting distortionary taxes) for equity and allow some
amount of redistribution (Box 3.2).

Climate Policies to Keep Paris within Reach
Conceptual Framework
Past experiences with GHG mitigation policies
throw only a partial light on such policies’ near-term
macroeconomic impacts. Most empirical studies point
to negligible near-term effects of mitigation policies
on output and inflation (Metcalf and Stock 2020;
Konradt and Weder di Mauro 2021). But the policies

NEAR?TERM MACROECONOMIC IMPACT OF DECARBONIZATION POLICIES

analyzed in these studies are much smaller in scale and
scope than the policies that will be required to achieve
a path consistent with reaching the Paris Agreement’s
goals, which limits the studies’ empirical information
content for the questions at hand.
The literature has long recognized this tension,
and numerous large-scale general equilibrium global
models have been used to analyze the impact of
GHG mitigation policies on emissions and economic
activity in the long term. However, very few have
been designed to simultaneously incorporate enough
granularity in key sectors (energy generation, transportation), model-consistent expectations, nonlinearities
that reflect increasing marginal cost to the decarbonization process, and the nominal and real rigidities
required to analyze the near-term consequences of large
policy changes for inflation and output (see Box 3.1
for a review of the empirical literature and an indirect
validation of the GMMET’s quantitative properties
based on a battery of large-scale models’ simulations
of the effect of a gradual rise in carbon tax in the
United States).
This chapter relies on the new GMMET, which
shares a set of key features with the IMF’s workhorse
Global Integrated Monetary and Fiscal (GIMF) model.
Like the GIMF model, the GMMET is a multicountry, microfounded, nonlinear dynamic general equilibrium model used to simulate the transition between an
initial condition and a final steady state. Households
and firms are forward-looking and choose consumption, labor supply, asset holdings, and investment
optimally, considering their preferences and expected
lifetimes. Nominal and real frictions as well as the
explicit modeling of expectations allow the analysis of
cyclical fluctuations and governments’ related stabilization policies. The GMMET is configured for four
regions: China, the euro area, the United States, and a
block representing the rest of the world.
The purpose of the GMMET is to analyze the shortand medium-term macroeconomic impact of curbing
GHG emissions. Such an analysis requires a detailed
description of GHG-emission-generating activities and
their interaction with the rest of the economy. These
activities include fossil fuel mining and trade, electricity generation using various technologies (capturing
the intermittence of renewable sources, discussed in
more detail in Box 3.3), transportation with electric
vehicles and conventional cars (with network externalities between electric vehicles and charging stations
accounted for), and energy use in the production of
International Monetary Fund | October 2022

75

WORLD ECONOMIC OUTLOOK: COUNTERING THE COST?OF?LIVING CRISIS

goods and for residential heating, as well as activities
that emit non-fossil-fuel GHGs, such as agriculture.
Online Annex 3.1 and Carton and others (2022)
outline these activities, which are novel relative to
the GIMF model.

Under the Hood: Analytical Simulations
Using the GMMET
To set the stage, this section focuses on analytical
simulations that allow the effect of key elasticities
to be disentangled and different plans for recycling
GHG tax revenues to be contrasted. In all exercises
in this section, GHG taxes are increased gradually
and globally over the next eight years, such that
every region decreases its GHG emissions by about
25 percent. Each region chooses a different level for its
GHG price, as each has different degrees of emission
intensity in electricity generation and in its productive
industries. For example, Chinese steel manufacturing
relies heavily on coal, the euro area already has a large
share of renewables technology for its electricity generation, and the United States has the highest level of
consumer use of electricity and of fossil fuel usage for
heating and transportation.6
A key caveat of this chapter’s simulation exercises is
that they implicitly compare policy scenarios against
a no-catastrophe, no-action baseline that is environmentally not feasible. Forgoing mitigation action until
2030 implies irreversible jeopardization of the future of
the climate system whose long-term costs are expected
to be very large, even if difficult to quantify (October
2020 World Economic Outlook, Chapter 3; Keen and
others 2021). The exercises on delayed mitigation
policy presented in the following subsections address
this point by comparing mitigation action today with
its true alternative: rushed delayed action.
Energy Transition: How Quickly Can It
Be Achieved?
The pace at which an economy can transition out
of fossil fuels hinges heavily on the pace at which
electricity generation can wean itself off such fuels,
and, in particular, off coal. Two elasticities are key for
this process in the GMMET: the elasticity of substitution of fossil fuels—especially coal—for renewables in
6To understand details on the differences in model calibration that
have an impact on results in the four regions, please see “Calibrating
the Energy Sectors” in Online Annex 3.1 and “Decarbonization in
Different Regions: A Primer” in Online Annex 3.3.

76

International Monetary Fund | October 2022

electricity generation and the elasticity of substitution
of electricity for other fossil fuels in the production of
goods and services. Considerable uncertainty surrounds
the value of the first elasticity. On the one hand,
structural, technological, and geopolitical impediments
(such as insufficient backup power and grid integration
for intermittent renewables, slow technological progress in regard to electricity storage, bottlenecks in the
supply of metals for renewables and the electricity grid,
trade restrictions, and supply chain issues) may prevent
a rapid transition to renewables-based electricity generation. On the other hand, rapid technological progress
has led to massive improvements in efficiency and
drops in prices of renewable energy, and the outlook
for storage capacity technology is favorable (October
2020 World Economic Outlook, Chapter 3).7
Under the benchmark calibration, the share of
renewables in electricity generation increases by 20 percentage points by 2030. This increase is broadly in
line with the experiences of Germany and California
but is faster than what larger countries or regions have
achieved so far.8 An alternative calibration assumes the
pace at which electricity generation can be decarbonized to be roughly half as fast under the same policies,
reflecting the experience of China and the United
States over the past decade (the European Union is in
between, with an increase in the share of renewables
by about 15 percentage points). In this calibration,
industry and consumers have to shoulder a larger
part of the required decarbonization, and a sharper
increase in GHG taxes (as much as twice as large) will
be necessary to reach the goal of a 25 percent drop in
emission by 2030.
Under the alternative calibration, elasticities of
substitution related to the use of fossil fuels are lower
(reduced to one-fourth in electricity generation, halved
in the manufacturing sector; see Annex Table 3.1.2).
Figure 3.2 contrasts the outcome of the two calibrations and displays the range of possible macroeconomic effects of the energy transition in two different
cases. The first case assumes that tax revenues are fully
rebated to households in the form of a lump-sum
7See Online Annex 3.1 for a more complete description of the
energy generation sector in the GMMET, as well as key elasticities
driving the pace of energy transition and its importance for investment in high- and low-carbon-intensity capital.
8The improvements in renewables technologies and the decline
in prices since Germany and California deployed such technologies
suggest a higher speed of decarbonization could be envisioned today
in certain countries.

CHAPTER 3

Figure 3.2. Macroeconomic Impact in 2030 of a GHG Tax
under Different Calibrations of Elasticities
(Deviation from baseline)
Lower elasticities require higher GHG prices to achieve the same reduction in
emissions by 2030 and magnify the macroeconomic impacts.
Benchmark elasticities

Lower elasticities

250 1. GHG Price
(US dollars a tCO2e)
200
150
100
50
0

Trans.
P1
United States

Trans.
P1
Euro area

Trans.
P1
China

Trans.
P1
Rest of the world

2 2. Real GDP
(Percent)
0
–2

–6

0.8

Trans.
P1
United States

Trans.
P1
Euro area

Trans.
P1
China

Trans.
P1
Rest of the world

Trans.
P1
China

Trans.
P1
Rest of the world

. Head ine In?ation
(Percentage point)

0.6
0.4
0.2
0.0

transfer (labeled “Trans.” in the figure). This isolates
the effect of climate policy from fiscal policy, since
fiscal policy using lump-sum transfers is nondistortionary and budget-neutral. The second case is described
later in this section and assumes that tax receipts are
partly recycled through a labor income tax cut (Policy
Package 1, labeled “P1” in the figure). Under the
alternative calibration, Policy Package 1 reduces GDP
by 1–2 percent in China, the euro area, and the US
by 2030.9 These costs are roughly twice as large as
those under the benchmark calibration but remain
manageable; the two calibrations span a range of
0.15–0.25 percentage point of annual growth.10 They
are dwarfed by the immense risks to lives and livelihoods across the world (IPCC 2022) and very large
long-term output costs associated with a business-asusual policy potentially leading to catastrophic climate
disruptions (see Chapter 3 of the October 2020 World
Economic Outlook for estimates of averted damage).
Alternative Options to Recycle GHG Tax Revenues

–4

–8

NEAR?TERM MACROECONOMIC IMPACT OF DECARBONIZATION POLICIES

Trans.
P1
United States

Trans.
P1
Euro area

A higher GHG tax, because it increases the price
of energy, has been compared to an oil price shock
(Pisani-Ferry 2021). But the apparent similarity can
be misleading. GHG tax revenues can be redistributed
domestically to alleviate some of the burden of the new
tax for producers, consumers, or both.11 Moreover, oil
price shocks are often sudden, unexpected, and temporary, whereas in the simulations here, GHG taxes
rise gradually from 2022 onward. A better frame of
reference is the literature on productivity shocks (see,
for example, Galí 2015). In this chapter’s simulations,
a GHG tax leads to a permanent decline in future productivity. Forward-looking agents will anticipate a drop
in future profits and income due to higher expected
future energy prices and will cut investment and

2 4. Labor Productivity
(Percent)
0
–2
–4
–6

Trans.
P1
United States

Trans.
P1
Euro area

Trans.
P1
China

Trans.
P1
Rest of the world

Sources: Global Macroeconomic Model for the Energy Transition; and IMF staff
estimates.
Note: P1 = Policy Package 1: two-thirds labor tax cuts and one-third transfers to
households; GHG = greenhouse gas; tCO2e = metric ton of carbon dioxide
equivalent; Trans. = recycling GHG tax revenue as transfers to households.

9For illustration, 1.5 percent of US GDP is about $320 billion
and corresponds to the climate portion of that country’s recently
passed Inflation Reduction Act; the costs would be spread over
eight years, or $40 billion a year.
10The rest-of-the-world region aggregates different economies, and
drawing conclusions in regard to individual countries is not possible.
The region encompasses the bulk of fossil fuel producers and is characterized by high energy intensity—in particular, high oil intensity. On
net, the GDP impact is dominated by fossil fuel producers that are
particularly affected during the transition as demand for fossil fuel and
investment drops (see Chapter 3 of the October 2020 World Economic
Outlook and “Decarbonization in Different Regions: A Primer” in
Online Annex 3.3 for further discussions).
11In a supply-and-demand analogy, an oil price shock represents
a shift of the supply curve, while a GHG tax is a shift along the
supply curve.

International Monetary Fund | October 2022

77

WORLD ECONOMIC OUTLOOK: COUNTERING THE COST?OF?LIVING CRISIS

consumption accordingly.12 In the short to medium
term, while the tax is still low, lower aggregate demand
dominates the increase in energy costs, and a central
bank focused on stabilizing core inflation will want to
accommodate the shock (see Online Annex 3.3 and
Chapter 2 of the 2022 External Sector Report for a
discussion of the impact on the real interest rate).13
GHG taxes generate fiscal revenues that can be used
to (1) help accelerate the transition, through incentives, subsidies, and public investment; (2) cushion the
taxes’ effect on firms’ output and household income;
or (3) compensate low-income households through
targeted transfers. These options are part of fiscal
policy, and countries will choose among them in line
with their preferences and political economy considerations.14 The following illustrates the implications of
these choices for macroeconomic outcomes. Figure 3.3
contrasts three different strategies by which GHG tax
revenues are recycled in the economy, by (1) reducing
distortionary labor income taxes,15 (2) subsidizing
production by sector to offset the effect of the tax and
provide incentives for the transition to less-carbonintensive energy (akin to a “feebate”), or (3) simply
rebating the tax’s proceeds to households.
The tax has a very similar impact on inflation across
the different strategies, reflecting the central bank’s
assumed credibility, that is, that it would respond to
inflation to keep firms’ and households’ inflation expectations anchored. Increasing the GHG tax increases the
relative price of fossil fuels and, given that other prices
in the economy do not move quickly, also increases
the overall price level. Absent indexation schemes,
12Investment

in carbon-intensive capital will drop as firms
adjust to the soon-to-become-obsolete capital stock. Investment in
renewables and associated capital increases but not enough to offset
the drop in carbon-intensive capital (see Online Annex 3.2). The
price of energy in general increases. If lump-sum transfers are large,
consumption increases in the short term, but the effect is short-lived.
In the medium to long term, consumption declines as well owing to
the tax’s impact on households’ permanent income.
13Note that the material that follows makes no attempt to derive
“optimal (in the sense of welfare-maximizing) policy.” The goal is
to illustrate and guide, not to be normative, as the preferred policy
is left to countries’ authorities, given their individual situations and
preferences. For discussions of optimal policy in response to an oil
price shock, please refer to Blanchard and Galí (2007); Castillo,
Montoro, and Tuesta (2007); Nakov and Pescatori (2010); and
Natal (2012).
14Recycling tax revenues through lump-sum transfers is
budget-neutral and nondistortionary, which averts any mixing up of
the effects of climate and fiscal policy.
15The labor supply elasticity is 0.15, in the middle of the range of
available estimates.

78

International Monetary Fund | October 2022

Figure 3.3. Macroeconomic Impact of Different Recycling
Options in the United States
(Percent deviation from baseline, unless noted otherwise)
Different revenue-recycling options shape the impacts of a given greenhouse gas
price path on the US economy.
Transfers

Labor tax cut

Production subsidies

0.2 1. Real GDP

. Head ine In?ation
(Percentage point
deviation from
baseline)

0.0
–0.2

0.3

0.2

–0.4
–0.6
–0.8

0.1

–1.0
–1.2
–1.4
2022

24

26

28

30

0.8 3. Employment

2022

24

26

28

4. Wages

0.6
0.4
0.2
0.0
–0.2
–0.4
–0.6
–0.8
2022

24

26

28

30

1.5 5. Real Consumption

2022

24

26

28

6. Real Investment

0.0
30
5.0
4.0
3.0
2.0
1.0
0.0
–1.0
–2.0
–3.0
–4.0
30
1.0

1.0

0.0

0.5

–1.0

0.0

–2.0

–0.5

–3.0

–1.0

–4.0

–1.5
2022

24

26

28

30

2022

24

26

28

–5.0
30

Sources: Global Macroeconomic Model for the Energy Transition; and IMF staff
estimates.
Note: Results based on benchmark elasticities.

the impact is limited to the tax’s first-round effect
on energy prices. However, the impacts on the labor
market, output, and output’s use differ substantially
across the three recycling strategies. While both lumpsum transfers and labor tax cuts boost consumption by
transferring more income to households, only labor tax
cuts, by reducing a disincentive to work, have a positive

CHAPTER 3

NEAR?TERM MACROECONOMIC IMPACT OF DECARBONIZATION POLICIES

impact on both employment and output. Transfers
compensate low-income households for higher energy
prices and thereby mitigate the regressive effects of the
GHG tax. Production subsidies have a beneficial effect
on investment but at the expense of consumption, as
they preclude transfers or tax cuts to households.

complements measures to support households during
the transition with subsidies to low-emission sectors
(renewables, nuclear and hydro power plants, and purchase of electric vehicles). Subsidies support investment
more than in Policy Package 1. Using the revenues
for subsidies comes at the expense of consumption,
as it reduces the allocations to tax cuts and transfers.
Moreover, because Policy Package 2 offers incentives
for investment, the required emission reduction can
occur with lower GHG taxes and therefore less inflation (see Online Annex 3.3 for more details, including
the external dimension). This scenario illustrates that
a strategy relying on large subsidies for low-emission
technologies poses little risk of inflation.
Differences across countries and regions reflect
mainly different starting values in terms of energy use,
proportion of fossil fuels in the consumption basket,
and GHG tax increases required to reach the 25 percent decarbonization goal (Figure 3.4). Projections
for inflation in China are a case in point. Because
households’ direct energy consumption accounts for
a lower share of the consumer price index (CPI) in
China, the GHG tax increase does not affect the CPI
as much there as in the other regions in the simulation. As a result, the demand-contracting effect of the
tax dominates and pushes the core part of the price
index down. The impact on growth is much larger in
the rest of the world—a residual category dominated
by fossil fuel exporters and oil-intensive economies—
reflecting the rapid energy transition assumed in the
chapter’s homogeneous reduction of emissions by
25 percent. To reflect the Paris Agreement’s principle
that responsibility for decarbonization efforts must
be simultaneous but can be differentiated, Online
Annex 3.3 analyzes the global impact on emissions,
output, and inflation when the rest of the world

Feasible and Balanced Climate Policy Packages to
Keep Paris within Reach
This subsection looks at feasible climate policy packages designed to align emissions by 2030 with the Paris
Agreement while striking a balance among maximizing
employment, output growth, investment in renewables,
and compensating low-income households. The three
policy packages examined have different objectives, but
all attempt a compromise in which energy transition
is realized at relatively low cost in terms of output and
inflation. All packages allow for some income redistribution through transfers but combine different policy
instruments and tax-recycling strategies (see Table 3.1).
Policy Package 1, by using two-thirds of GHG tax
revenues to cut labor income taxes, focuses on the
need to engineer the required decarbonization without
overly penalizing consumption. Relatively higher GHG
taxes are required to provide incentives for reallocation
toward less-carbon-intensive production processes, and
investment declines more than in the other packages. Policy Package 3 focuses on supporting firms
during the transition. The transition is then relatively
smooth in terms of investment, which drops much
less than in Policy Package 1. Because tax receipts are
entirely rebated to firms, households bear the brunt
of the tax-induced slowdown, and the consumptionto-investment ratio declines. Policy Package 2 can be
seen as a combination of Policy Packages 1 and 3, as it

Table 3.1. Three Policy Packages Reducing Emissions by 25 Percent in 2030
Package 1
Package 2
Package 3
Gradual GHG price increase from 2023 to 2030 Gradual GHG price increase from 2023 to 2026 Gradual GHG price increase from 2023 to 2030
Two-thirds of revenue used to reduce labor taxes One-third of revenue used to reduce labor taxes GHG revenue rebated at the sectoral level
(electricity generation, manufacturing, services)
One-third of revenue transferred to households One-third of revenue transferred to households GHG revenue from households’ activities
(residential energy and individual
transportation) transferred back to households
One-third of revenue used to subsidize
Regulation of share of electric vehicles
low-emission sectors:
• Renewables investment
• Nuclear and hydro power plants
• Electric-vehicle purchase
Source: IMF staff compilation.
Note: GHG = greenhouse gas.

International Monetary Fund | October 2022

79

WORLD ECONOMIC OUTLOOK: COUNTERING THE COST?OF?LIVING CRISIS

Figure 3.4. Macroeconomic Impact of the Three Policy
Packages in Regions in the Simulation
Green subsidies (Package 2) reduce the need for greenhouse gas price increases
and result in lower in?ation for the same policy rule. Production subsidies
(Pac age ) boost investment and P with little impact on in?ation.

Real GDP
(Percent deviation from
baseline)

ead ine In?ation
(Percentage point deviation
from baseline)

Package 1

Package 2

0.2 1. United States

Package 3

2. United States

0.

0.0

0.2

0.2

0.

0.

0.0

0.

0.

0.
2022
0.

2

2

2

30

3. Euro Area

2022

2

2

2

30

0.2

0.

4. Euro Area

0.2
0.2

0.0
0.2

0.

0.
0.

0.0

0.
.0
2022

2

2

2

30

0.2 5. China

2022

2

2

2

6. China

30

0.

0.

0.0
0.2

0.0

0.
0.
0.

0.
.0
.2
2022

2

2

2

30

.0 7. Rest of the World

2022

2

2

2

8. Rest of the World

30

0.2

0.
0.

0.0

0.

.0

0.2
2.0

0.

.0
.0
2022

0.0
2

2

2

30

2022

2

2

2

30

0.

ources: lobal acroeconomic odel for the nergy Transition and F staff
estimates.
Note: esults based on benchmar elasticities. Policy Pac age : one third
transfers to households, two thirds labor tax cuts Policy Pac age 2: one third
transfers to households, one third labor tax cuts, one third green subsidies Policy
Pac age : production subsidies and transportation regulation. ee Table . for a
full description of the three policy pac ages.

80

International Monetary Fund | October 2022

does not introduce any new policy.16 In such a case,
the rest of the world’s investment declines only in
extraction industries, and the GDP impact is muted
(see Annex Figure 3.3.3).
All simulations discussed so far have assumed perfectly credible monetary and climate policies. The next
section analyzes the implications of climate policy for
the macroeconomy when announced policies are less
than perfectly credible.

Credible Policies: Key for a Successful Transition
Credibility of Climate Policy
So far, the scenarios presented have assumed governments’ climate policies to be fully credible: the private
sector (both firms and households) takes current and
future policies, including the path of the GHG price,
into account to adjust its decisions. Policy Package 2,
in which credible green subsidies provide powerful
incentives to unleash private green investment and
allow the required emission reduction with lower
GHG taxes than in Policy Package 1, clearly shows
the importance of credible policy. This subsection
illustrates the importance of credible climate policy by
relaxing the assumption of full credibility under Policy
Package 1, with its gradually increasing GHG tax path.
Climate policy is assumed to be believed only gradually over time (partial credibility): more specifically,
each increment of the GHG tax is expected to remain
in place, but future increments of the GHG price
path come as a surprise, thereby having no impact on
households’ and firms’ current decisions.
For given GHG price paths, partial credibility slows
down the emission reduction process relative to the
full-credibility case (the cumulative emission reduction
by 2030, expressed as a share of 2022 emissions, is
about 20 percent lower under partial credibility than
under full credibility; see Figure 3.5), as investment in
emission-intensive capital does not decline as rapidly.
The key reason lies in the adjustment of investment in
16See Mirzoev and others (2020) for a discussion of carbon
transition risks in Gulf Cooperation Council countries. For these
countries, accelerating the diversification of their economies is key.
Policies that seek to strengthen the non-oil sector through better
business regulation, greater credit availability, reforms to the labor
market, and increased sources of non-oil revenue for the government
should be prioritized. In cases in which the transition involves a
large drop in aggregate demand, fiscal stimulus can be envisioned,
provided fiscal space is comfortable enough (see Chapter 3 of the
October 2020 World Economic Outlook for further analysis).

CHAPTER 3

Figure 3.5. Impact in 2030 of Fully and Partially Credible
Mitigation Policies
Less credible policies either miss the GHG reduction target when meeting GHG
rice aths o ing to insuf?cient shifts in the ca ital structure or require higher
GHG prices to meet the GHG reduction targets at a higher macroeconomic cost.
Fully credible
Partially credible—same GHG price paths
Partially credible—same GHG reduction targets
75 1. Cumulative GHG Emissions
(Percent of 2022 emissions deviation from baseline)
50
25
0
–25
–50
–75
–100
–125
United States
Euro area
China
Rest of the world
15 2. Capital Stock in the Energy Sector
(US dollars a tCO2e)
10
5
0
–5
–10
–15

Decl.
Exp.
United States

Decl.
Exp.
Euro area

Decl.
Exp.
China

Exp.
Decl.
Rest of the world

China

Rest of the world

China

Rest of the world

200 3. GHG Price
(US dollars a tCO2e)
150
100
50
0

United States

Euro area

2 4. Real GDP
(Percent deviation from baseline)
1
0
–1
–2
–3
–4

United States

Euro area

Sources: Global Macroeconomic Model for the Energy Transition; and IMF staff
estimates.
Note: Results based on Policy Package 1 with benchmark elasticities.
Decl. = declining energy sector: fossil fuel extractions and coal power plants;
Exp. = expanding sectors: renewables, nuclear, hydro and fossil gas generation,
electricity grid. See Table 3.1 for a full description of the three policy packages.
GHG = greenhouse gas; tCO2e metric ton of car on dio ide equivalent

NEAR?TERM MACROECONOMIC IMPACT OF DECARBONIZATION POLICIES

the electricity sector. When climate policy is fully credible, the anticipation of further GHG price increases—
which will undermine future profitability—accelerates
the shift of capital away from emission-intensive
investments, such as coal power plants, toward
low-emission alternatives.
Partially credible policy requires higher GHG taxes
to reach the same decarbonization goal, leading to
larger GDP losses by the end of the decade (in the
United States, the euro area, and China, GDP declines
by 1.0, 1.0, and 1.2 percent, respectively, rather than
0.6, 0.5, and 0.6 percent).

Credibility of Monetary Policy
The current high-inflation environment has raised
concerns that climate policy could create large
output-inflation trade-offs, complicate the job of
central banks, and potentially stoke wage-price spirals.
This subsection shows that as long as central banks
retain their inflation-fighting credentials, any trade-offs
implied by the sort of climate policy studied in this
chapter are bound to be small. As a matter of fact,
climate policy, if implemented gradually, should be easier for central banks to handle than supply shocks in
which the energy price increases suddenly and creates
an immediate challenge for monetary authorities. If
central banks lose credibility, however, trade-offs will
be amplified, underscoring the importance of monetary policy credibility. Climate policy is no exception
in this respect. If monetary policy is not credible, any
cost-push shock is bound to entail larger trade-offs
(Woodford 2003; Galí 2015). When monetary policy
credibility prevents the de-anchoring of inflation
expectations, a gradually implemented climate policy
package will not give rise to a material output-inflation
trade-off (see Figure 3.6 for results in regard to Policy
Package 1). A comparison of the impact of a higher
GHG tax on output and inflation under two different
monetary policy rules reveals no major differences
between targeting core inflation (that is, excluding
energy items) and a modified version in which the
targeting includes the change in GHG price (core plus
GHG price). Targeting core inflation will give rise to
slightly higher headline inflation because of the tax’s
direct impact on noncore CPI components, while
targeting the modified version of core inflation (core
plus GHG price) will have a larger cost in terms of lost
output (necessary to bring about the required decline
in marginal costs and core inflation to offset the tax’s
International Monetary Fund | October 2022

81

WORLD ECONOMIC OUTLOOK: COUNTERING THE COST?OF?LIVING CRISIS

Figure 3.6. Macroeconomic Impact of Different Monetary Policy
Targets in the United States
(Percentage point deviation from baseline, unless noted otherwise)
Including the impact of the GHG price on the consumer price index has limited
macroeconomic implications as long as monetary policy credibility prevents any
de anchoring of in?ation expectations.
Benchmark: core + GHG price
Benchmark: core

Lower: core + GHG price
Lower: core

.0 1. Real GDP
(Percent deviation from baseline)

0.

0.0
0.
.0
.
2.0
2.
2022
0.

24

26

28

0

24

26

28

0

26

28

0

26

28

0

2. Policy Rate

0.
0.2
0.0
0.2
0.
2022
0.

. ead ine In?ation

0.
0.
0.2
0.
0.0
0.
2022
0.

24
. Core In?ation

0.0
0.
0.2
0.
0.
0.
2022

24

Sources: Global Macroeconomic Model for the Energy Transition; and IMF staff
estimates.
Note: Results based on Policy Package 1 with benchmark and lower elasticities
described in Annex Table . . . ee Table . for a full description of the three
policy pac ages.
greenhouse gas.

82

International Monetary Fund | October 2022

impact on noncore prices) but will drive headline
inflation back to target. The difference in magnitudes
remains quite small. In essence, core plus GHG price
targeting keeps headline inflation close to target in the
absence of shocks to other noncore components.
Of course, a great deal depends on how easily
electricity generation can transition out of fossil fuels
toward renewables. Larger frictions than assumed in
the benchmark calibration would imply that to reach
decarbonization goals, governments would have to
increase GHG taxes substantially more and faster
(than in the benchmark elasticity case), with implications for growth and inflation. Figure 3.6 illustrates
the differences. For example, under the alternative
(lower-elasticity) calibration and core plus GHG price
targeting, by 2030 GDP would be about 1¼ percent
lower than under the benchmark calibration.
In today’s high-inflation environment, if monetary
policy were to lose credibility, wages could start indexing to past inflation levels. As a result, the inflation
process would become more inertial, which would
result in inflation depending more on past inflation
rather than being anchored to the inflation target. In
such an environment, introducing climate policies,
such as Policy Package 1, could potentially lead to
second-round effects and larger output-inflation tradeoffs. Figure 3.7 shows that in such a case, stabilizing
the modified version of core inflation (core plus GHG
price) would have a significantly higher cost in terms
of output, while stabilizing output could trigger a
wage-price spiral as the central bank stimulates the
economy enough to keep labor demand and real wages
in check, pushing up nominal wages and prices in a
feedback loop.
Inflation expectations have remained broadly
anchored in a majority of countries and, in particular,
in the large emitters that are the chapter’s focus (see
Chapters 1 and 2). In countries where central banks
might be less credible, alternative policy packages that
have a much smaller impact on prices (for example,
Policy Package 2) could be favored in case concerns
about the anchoring of inflation expectations are
warranted.17
While this exercise is meant to be mainly illustrative, highlighting the unpleasant trade-offs that could
17In such a case, policies that entail a smaller pass-through to
headline inflation may be favored, such as combining a GHG
price with subsidies for low-emission technologies in electricity or
transportation.

CHAPTER 3

Figure 3.7. Macroeconomic Impact of Different Monetary
Policy Targets under Wage Indexation
age inde ation orsens the out ut-in?ation trade-off
Benchmark elasticities: wage indexation, core + GHG tax targeting
Benchmark elasticities: wage indexation, GDP targeting
Lower elasticities: wage indexation, core + GHG tax targeting
Lower elasticities: wage indexation, GDP targeting
1 1. Real GDP
(Percent deviation from baseline)
0
–1
–2
–3
–4
2022
2

24

26

28

30

28

30

. Head ine In?ation
(Percentage point deviation from baseline)

1

0

–1
2022

24

26

ources: lo al acroeconomic odel for the nerg ransition and
staff
estimates
Note: esults ased on olic ac age
ee a le
for a full descri tion of the
three olic ac ages anels de ict alternative age and rice hilli s curves
enchmar and lo er elasticities descri ed in nne a le
GHG =
greenhouse gas

result from a lack of central bank credibility could raise
the question of whether it is reasonable to wait—as
some have proposed—until inflation is tamed before
implementing the required climate policies. The next
section shows that waiting would only complicate the
transition.

Transition Costs under Further Delays
As noted earlier in this chapter, gradually phased-in
climate policy packages that are rolled out without
delay would have only very limited consequences in
regard to inflation, provided central banks remain
credible. A prominent concern at the current

NEAR?TERM MACROECONOMIC IMPACT OF DECARBONIZATION POLICIES

juncture, however, is that climate mitigation policies
could de-anchor inflation expectations by raising
the specter of future GHG-price-driven inflationary
pressures in an already-high-inflation environment.
This section asks whether delaying the necessary climate action by a few years, until inflation is brought
under control, could be an option.
To assess this policy option, Policy Package 1 starting in 2023 is compared with a delayed mitigation policy package that starts in 2027 but is still compatible
with the Paris Agreement’s objective in that it achieves
the same reduction in cumulative emissions in the
long term. The results are reported only for the United
States; Online Annex 3.4 presents other regions’
results. The delayed package has the same composition
as Policy Package 1 but is phased in more rapidly and
has a higher GHG tax for some years, since a steeper
decline in emissions is required to offset the unmitigated accumulation of emissions from 2023 to 2026.
Both packages assume credible monetary policy.
The higher speed at which the transition must take
place if it is delayed significantly worsens the outputinflation trade-off (Figure 3.8). First, larger annual
increments in the GHG tax directly generate larger
increases in headline inflation. Second, a shorter transition period leads to a rapid fall in the utilization of
capital for the production of fossil fuels, at a large cost
to firms and their profitability. This is in addition to
the decline in investment by all firms to allow them to
shift out of any emission-intensive capital. If monetary
policy targets output (to decline at the same pace as in
the gradual scenario), headline inflation increases by
much more than in Policy Package 1 (dashed red line);
if it targets the modified version of core (core plus
GHG price), output drops much faster (solid red line).
Therefore, if the concern is that higher GHG taxes
may end up threatening central banks’ credibility,
leading to larger output-inflation trade-offs, delaying
climate policy does not appear to be a reasonable
option. A risk management approach to monetary
policy might instead suggest starting to implement the
necessary GHG taxes right away and leaning against
their impact on headline inflation. Doing so (solid
blue line in Figure 3.6) would minimize the risk that
higher headline inflation will weaken the central bank’s
credibility and lead to widespread wage indexation and
higher inflation inertia.
Comparing this policy approach with the alternative of delaying climate policy implementation to
after 2026 highlights the much larger costs, in both
International Monetary Fund | October 2022

83

WORLD ECONOMIC OUTLOOK: COUNTERING THE COST?OF?LIVING CRISIS

inflation and output, of the latter option. Further
procrastinating requires an even more rushed transition
in which inflation can be contained only at significant
cost to real GDP.

Figure 3.8. Gradual and Delayed GHG Mitigation Policies in
the United States
Dela ing mitigation olicies considera l
Gradual

orsens the out ut-in?ation trade-off

Dela ed in?ation target

Dela ed

D target

Conclusions and Policy Implications

160 1. GHG Price
(US dollars a tCO2e)
120
80
40
0
2022

24

26

28

30

32

16 2. Excess GHG Emissions from Delaying Policies
(Percent of baseline emissions)
12
8
4
0
–4
–8
2022
0

24

26

28

30

32

34

36

38

40

3. Real GDP
(Percent deviation from baseline)

00
0
0
2

20

0

0

1

2
ears since im lementation

3

4

3

4

. Head ine In?ation
(Percentage point deviation from baseline)

0
0
02
0
00
0

0

1

2
ears since im lementation

ources: lo al acroeconomic odel for the nerg ransition and
staff
estimates
Note: esults ased on olic ac age
ith enchmar elasticities onetar
olic targets ore
rice under radual and Dela ed nder Dela ed
D target monetar olic targets the same D as in radual
greenhouse gas t 2e metric ton of car on dio ide equivalent

84

International Monetary Fund | October 2022

Decades of procrastination on climate policy have
made it all the more urgent to act now. To keep the
Paris Agreement’s goal within reach, GHG emissions
must decline by 25 percent, with respect to current
levels, by 2030. Achieving such a result would require
unprecedented global effort and would represent a serious acceleration with respect to the past decade. Rising
concerns about energy independence offer the opportunity to bolster the transition in the energy sector.
How costly such efforts could be depends a great
deal on how quickly electricity generation can be
decarbonized. The more difficult it is to transition to
clean electricity, the larger the GHG tax increase will
have to be to provide incentives for larger efforts in
other sectors—and the larger the macroeconomic costs
in terms of growth and inflation. Different calibrations
of elasticities of substitution away from fossil fuels suggest global GDP could be between 0.9 and 2.0 percent
below baseline by 2030, which would amount to a
slowdown of 0.15 to 0.25 percentage point in yearly
growth. Inflation could increase to reach 0.1 to
0.4 percentage point above baseline. Considerable variation across regions is to be expected, with the largest
effects concentrated among fossil fuel exporters.
While not trivial, these costs are manageable and
dwarfed by the innumerable long-term benefits (in
regard to output, financial stability, health) of arresting climate change (October 2020 World Economic
Outlook; IPCC 2022) that have been thoroughly documented by climate science. However, the route to
Paris could become more onerous if a series of conditions are not met. First, the required climate policies
need to be implemented immediately. Further delaying implementation will amplify the output-inflation
trade-offs that central banks may face. An immediate
start will allow a gradual process whereby GHG taxes
can be increased in small and predictable increments,
driving private expectations and behaviors and limiting inflationary pressures. Second, it is important
that new climate policy be credible. Credible climate
policies offer incentives for investment and research
and development in carbon-neutral technology and
help accelerate the shift in consumption patterns

CHAPTER 3

toward low-carbon alternatives. International experience shows that rebating tax revenues to low-income
households (which are bound to suffer the most from
the new carbon pricing) helps bolster acceptance and
reinforces such policies’ credibility. Third, monetary policy credibility complements climate policy
credibility and is essential to keep output-inflation
trade-offs low. Doubts about central banks’ price stabilization credentials could lead to more widespread
wage indexation and higher inflation inertia, which
would further amplify output-inflation trade-offs and
the cost of future stabilization. Concerns about current high inflation offer no justification for delaying
necessary actions.
It is not too late to avert the most catastrophic
climate damages, but ensuring that temperature
increases remain well below 2°C at a reasonable cost
will require immediate, credible, transparent, and

NEAR?TERM MACROECONOMIC IMPACT OF DECARBONIZATION POLICIES

ambitious action. Because GHGs know no borders,
the effort to accomplish this goal needs to be global.
The rise in geopolitical tensions related to the Russian
invasion of Ukraine and the recent deterioration in
China–US relationships have put global cooperation
on climate goals at risk. If different international standards arose, carbon border adjustment taxes could help
prevent excess leakage and accelerate the convergence
of tax and regulations to the highest global standard.
International coordination in GHG taxation could
also allow faster decarbonization, as low-hanging fruit
could be plucked in many countries that have not yet
started decarbonization. Productive areas of cooperation might include bridging data gaps, improving
reporting standards, and increasing access to climate
finance in emerging market and developing economies (October 2022 Global Financial Stability Report,
Chapter 2; Ferreira and others 2021).

International Monetary Fund | October 2022

85

WORLD ECONOMIC OUTLOOK: COUNTERING THE COST?OF?LIVING CRISIS

Box 3.1. Near-Term Implications of Carbon Pricing: A Review of the Literature

The authors of this box are Mehdi Benatiya Andaloussi and
Augustus J. Panton.
1The ETS is the EU’s flagship climate policy, establishing in 2005
a carbon market across Europe, with more than 11,400 plants in
31 countries regulated at present.
2In states involved in the emission market, power sector emissions dropped by close to 25 percent between 2000 and 2011.

86

International Monetary Fund | October 2022

Figure 3.1.1. Carbon Pricing in 2022 for
Selected Economies
Share of GHG emissions
Carbon price: carbon tax (right scale)
Carbon price: ETS (right scale)
100

160
120
100

60

80
40

60
40

20

20
South Africa
California, US
Korea
Luxembourg
Norway
Iceland
New Zealand
European Union
Sweden
Ireland
Germany
Finland
France
Switzerland
Uruguay

0

US dollars a tCO2e

140
80
Percent

Most empirical studies find that carbon-pricing
programs implemented so far, even though quite
modest, have led to significant reductions in emissions. Over the past two decades, a number of
countries have rolled out carbon-pricing programs,
with carbon tax rates and coverage of various magnitudes (Figure 3.1.1). Empirical analyses find that
despite low carbon prices, emission-trading markets
and carbon taxes have led to sizable reductions in
emissions. For instance, the European Union (EU)
Emissions Trading System (ETS)1 has been found
to have reduced EU-wide emissions by 3.8 percent
between 2008 and 2016, although the market covered
only 50 percent of EU carbon emissions and the price
remained below €20 a ton up to 2018 (Bayer and
Aklin 2020). ETS-regulated manufacturing plants
have been found to have reduced emissions by close
to 15–20 percent in France (Wagner and others 2014)
and Germany (Petrick and Wagner 2014). An emission market introduced in the northeastern US states
and targeting emissions from the power sector has
also been determined to have contributed more than
half of emission reductions achieved in the sector2 in
the late 2000s and early 2010s (Murray and Maniloff
2015), despite a low price averaging $2–$3 a ton
during the time period.
Carbon pricing’s macroeconomic impact remains
indiscernible, however, even though effects are more
tangible at the sectoral level. Recent macro empirical studies have assessed the impact of carbon taxes
on GDP using cross-country panel regressions and
have found no evidence that carbon taxes have led
to reductions in activity. Metcalf and Stock (2020)
and Konradt and Weder di Mauro (2022) focus
on the economic response to carbon tax changes in
EU countries, controlling for previous tax changes
or GDP growth, and point to negligible near-term
effects of mitigation policies on output and inflation.
One of the reasons could be related to the fact that
these countries were able to achieve emission reductions through investment in abatement technologies,

0

Sources: International Carbon Action Partnership; World
Bank (2022); and IMF staff calculations.
Note: ETS = Emissions Trading System; GHG = greenhouse
gas; tCO2e = metric ton of carbon dioxide equivalent.

the switching of production and demand to cleaner
technologies, and energy efficiency gains.
The effect of carbon pricing on activity seems
easier to identify using microeconomic data. Several
studies have found that the EU ETS has led firms
to reduce the carbon intensity of their production through improvements in energy efficiency.
An energy tax implemented in the UK resulted
in energy use reductions of 23 percent in targeted
manufacturing plants, leading them to cut emissions without cutting production or employment
or reducing productivity (Martin, de Preux, and
Wagner 2014). On the other end, carbon pricing has
been shown to affect sectors differently, depending
on their carbon intensity. For example, sectoral data
analysis reveals that the carbon taxation implemented in British Columbia, Canada, led to a fall in
employment in carbon-intensive and trade-intensive
sectors (Yamazaki 2017). Studies also show that
the 1970 US Clean Air Act3 had a negative impact
3The Clean Air Act regulates the emission of local air pollutants in the United States.

CHAPTER 3

NEAR?TERM MACROECONOMIC IMPACT OF DECARBONIZATION POLICIES

Box 3.1 (continued)
Table 3.1.1. Cross-Model Comparison of Changes in GDP
(Percent deviation from baseline)
Model
E3
DIEM
IGEM
NewERA
RTI-ADAGE
ReEDS-USREP
Model average

Lump-Sum Rebates
-0.8
-0.4
-0.8
-0.5
-0.8
-0.3
-0.6

2030
Labor Income Tax Cuts
-0.7
-0.2
0.2
-0.4
-0.6
-0.1
-0.3

Capital Income Tax Cuts
-0.6
0.8
0.5
0.2
0.9
0.0
0.3

Source: Goulder and Hafstead (2018).
Note: DIEM = Dynamic Integrated Evaluation Model; E3 = Goulder-Hafstead Environment-Energy-Economy;
IGEM = Intertemporal General Equilibrium Model; NewERA = National Economic Research Associates economic
consulting model; RTI-ADAGE = Applied Dynamic Analysis of the Global Economy; ReEDS-USREP = Region Energy
Deployment System model-US Regional Energy Policy model.

on employment in pollution-intensive industries
over the medium term: Employment in polluting
sectors fell by 15 percent in the 10 years following
an increase in the stringency of the regulation rolled
out in the 1990s (Walker 2011).
There are limitations to how much can be inferred
from past experiences to project future macroeconomic impacts of carbon pricing. First, the available
empirical evidence refers to policies that were much
smaller in scale and scope than those that will be
required to achieve a path consistent with reaching the
Paris Agreement’s goals. Second, the impact of carbon
pricing on output and inflation will vary depending
on the way climate policies are designed and the
other policies that accompany them. The multiplicity of channels through which climate policies have
an impact implies that disentangling their effects
(for example, on output and inflation) is empirically
challenging. The literature has long recognized this
tension, and numerous large-scale general equilibrium
global models have been used to analyze the impact of
greenhouse gas mitigation policies on emissions and
economic activity. The modeling literature suggests
that climate policies comparable to those needed to
achieve the Paris Agreement targets have moderate
adverse effects on output. It is important to note that
these output costs pale in comparison with the macroeconomic risk associated with the catastrophic climate
damages these policies aim to avert. Models with low
elasticities of substitution between carbon-intensive
and green-energy-generating technologies (NGFS
2022) and high capital adjustment costs (McKibbin
and Wilcoxen 2013), limited public subsidization of

the development of green technologies (Acemoglu and
others 2012), and difficulty in scaling up green energy
supply (IEA 2021) typically show higher output
costs. The design of climate policies also matters. For
instance, recycling carbon tax revenues as lump-sum
transfers to households helps support consumption
(Williams and others 2015; Goulder and others 2019),
while using the revenues to reduce distortionary taxes,
including labor income taxes, enhances growth and
investment more (Chiroleu-Assouline and Fodha
2014; Caron and others 2018; McFarland and others
2018; Böhringer and others 2021).
Goulder and Hafstead (2018) compare the output costs for the US from an economy-wide carbon
tax starting at $25 a ton in 2020 (and increasing by
5 percent annually until 2050) in six leading models
under three common recycling plans (see Table 3.1.1).
This would imply a carbon price reaching close to
$38 a ton in 2030 or about half of the $75 a ton tax
analyzed in this chapter across advanced economies.4
Under a lump-sum recycling scheme, model averaging
would suggest a cost of 1.2 percent of GDP by 2030
in the US, similar in scale to results from the Global
Macroeconomic Model for the Energy Transition
(GMMET) in advanced economies. Under a labor
income tax cut, model averaging would imply a
0.6 percent loss in GDP by 2030, while the GMMET
suggests essentially no loss in output over this horizon,
thanks to an increase in labor supply.
4With a linear approximation assumed, results in Table 3.1.1
could be multiplied by 2 to reflect the impact of a carbon tax