The IMF says avoiding a recession is ‘increasingly challenging’ as inflation becomes more difficult to control
With inflation at a new 40-year high, voices arguing that a recession is avoidable are becoming increasingly rare.
Kristalina Georgieva, managing director of the International Monetary Fund (IMF), said earlier this year that the U.S. could possibly weather this year’s disruptions to the global economy after emerging strong from the pandemic.
Now, the IMF says that preventing a downturn has become “increasingly challenging” in a Tuesday statement following an annual economic consultation with the U.S.
A recession is defined by two consecutive quarters of negative GDP growth. That number was down 1.5% for the first quarter of this year, and growth rates for the second quarter will be released at the end of this month.
The IMF pointed to inflation as the major risk factor for a recession, and wrote that both long- and short-term measures of inflation expectations have lately been skewing higher as geopolitical uncertainty, the pandemic, and supply-chain constraints all make it more difficult to control.
High inflation is a threat to both the U.S. and global economies, wrote the IMF. “In this context, [IMF directors] stressed that the policy priority must be to expeditiously slow price growth without precipitating a recession.”
The IMF’s warning about inflation was released a day before the Bureau of Labor Statistics announced on Wednesday that U.S. inflation had reached 9.1% in June, following a previous peak of 8.6% in May. The last time inflation was so high was during the era of “stagflation” in the late 1970s and early 1980s.
And just a few weeks ago, the U.S. Bureau of Economic Analysis (BEA) released its most recent data on consumer spending in the U.S., showing that inflation has begun to take a toll on people’s spending habits. Personal consumption expenditures (PCE), the BEA’s main spending index, increased only 0.2% in May—its smallest jump so far this year.
Adjusted for inflation, that number represents a 0.4% decrease in spending, according to the BEA’s report.
The Federal Reserve has already instituted three rate hikes to its baseline interest rate this year in order to combat inflation. Its most recent hike of 75 basis points in June was its largest since 1994, and similarly large hikes are expected throughout this year.
But each interest rate hike also increases the risk of going too far, and sparking a recession. On Wednesday, Bank of America Research announced that it anticipates a mild recession to unfold in the near term, in part owing to the expectation that federal monetary policy will continue to tighten.
“Our revised outlook suggests the Fed will indeed have to accept more pain than it wants,” wrote Bank of America’s economics team in its report, adding that it’s a risk that members “would be willing to pay.”
The IMF also acknowledges the recession risks that came along with raising interest rates its report on Wednesday: “Directors recognized that calibrating the response to inflation comes with high stakes and that misjudging the policy mix…will result in sizable costs at home and negative spillovers to the global economy.”