The study stated, in part, that the combination of a stronger-than-expected demand recovery, increased demand clogging supply networks, sectoral swings in demand, and a hot labor market provided a persuasive postmortem explanation for continually missing the inflation bout. With the advantage of hindsight, we are unquestionably wiser.
“When a vehicle speeds up, the vision field may compress, hiding risks in the distance. One odd aspect of the 2020 pandemic policy reaction was the vigorous economic boost, which some observers claimed mirrored wartime expenditures. Significantly, the forecasters’ knowledge set at the time included this stimulation.
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According to the report, too small a dose of fiscal stimulus would have risked prolonged scarring, just as doing too much also risked overstimulating the economy and sparking inflation.
Going forward, the IMF said the inflation outlook should better integrate the impact of fiscal policy, particularly in an environment where supply constraints amplify the impact of excess demand on inflation.
“Policymakers could have been advised to reduce their speed somewhat back in 2020 given the danger that was lurking down the road. But this remains a partial assessment. Only by comparing it with the counterfactual scenario of deep scarring can we really gauge the adequacy of the policy choices made back then,” the report read further.
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