In their August 2024 published article ‘Understanding the international rise and fall of inflation since 2020’ in the ‘Journal of Monetary Economics’, three writers from the Research Department of International Monetary Fund (IMF), and one other highlighted two reasons broadly that are apparently at odds with the otherwise policy prescription from both IMF through its extended fund facility (EFF) programme, and by ‘Chicago boys’-styled local policymakers.

Hence, while the research paper, which is based on data from 10 advanced economies and 4 emerging economies, saw broadly the role of external factors in driving up inflation, and that the secondary cause in the shape of monetary policy needed lesser usage in terms of tightening given such shocks had mostly influenced core inflation; that does not include the food and energy components, and in turn highlights the advanced impact of such shocks that have come through as secondary impacts after first influencing inflation that in turn is captured by more volatile measure of inflation in the shape of overall consumer price index (CPI).

The paper points out in this regard: ’Our results strongly suggest that global drivers, especially the sharp movement in energy prices, played a dominant role in driving the international rise and fall in inflation since 2020. Local policies also played a role.

First, the transmission of headline shocks to underlying inflation was shaped by local characteristics. …However, our estimates suggest that the role of relative price shocks and their pass-through into core has at this point largely faded, facilitating the convergence of inflation to target-consistent levels. The continued stability of long-term inflation expectations on average across economies is also facilitating the return of inflation to target.’

It is important to note that both the IMF and the SBP remained overly cautious with regard to monetary policy stance even though nothing significant has been transmitted in terms of global oil prices – which have mostly remained low relative to the highs seen during the early phase of Russia-Ukraine conflict, and mostly stable in general over the last number of months – and tariffs that were first announced in early April, and continued to remain paused most time since then, with the likelihood of being tapered down in general for most trading partners of United States, including for Pakistan.

Yet, such relative easing of inflationary impact – both evidenced from the paper cited above, for instance, and the fact that monetary tightening has already run a lot of course, squeezing immensely aggregate demand for many months – continues to be met by unwarranted caution from both IMF and SBP.........

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