The International Monetary Fund slashed global growth and revised inflation upward in its World Economic Outlook released Tuesday, calling on central banks to hike rates to avert an inflationary spiral.
The IMF sees inflation soaring to 5.7 percent in advanced economies and 8.7 percent in emerging and developing economies — a 1.8 and 2.8 percentage point increase, respectively, over the last forecast.
That's why "tighter monetary policy will be appropriate to check the cycle of higher prices driving up wages and inflation expectations, and wages and inflation expectations driving up prices," the IMF wrote, while acknowledging that in countries most affected by the war in Ukraine, "the trade-off between safeguarding growth and containing inflation will be more challenging."
Meanwhile, global growth has been revised downward to 3.6 percent in both 2022 and 2023, a shave of 0.8 percentage points this year and 0.2 percentage points in 2023 compared with the IMF's January forecast. Those revisions assume that the war remains limited to Ukraine; that further sanctions against Russia exempt the energy sector; and that the pandemic abates throughout the year.
In the EU, however, the drop is greater: Growth slows to 2.9 percent this year and 2.5 percent the next, or by 1.1 percentage points this year and 0.3 percentage points the next, due to the bloc's twin storms of an energy-import crunch and soaring energy prices.
Governments should prioritize supporting vulnerable households and refugees over debt consolidation, but "this support should be deployed in ways that avoid exacerbating ongoing supply-demand imbalances and prices pressures," the IMF wrote.
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