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IMF highlights targeted income support to address cost-of-living crises
The IMF said cost-of-living crises erode real wages and raise medium-term inflation expectations in its World Economic Outlook report, due to be published on 13 October. The institution recommended temporary, targeted income transfers instead of broad-based subsidies to protect low-income households.
The IMF shared a chapter prepared for its World Economic Outlook report, due to be published on 13 October, titled "Navigating a Shock-Prone World: Lessons from Cost-of-Living Crises."
The report noted that sudden increases in the cost of essential goods during cost-of-living crises can be highly persistent. It said these increases erode real wages, suppress domestic demand and push up medium-term inflation expectations.
The burden of the crisis falls more heavily on low-income households
The report pointed out that spending on essential goods accounts for a larger share of low-income households' budgets, leaving them disproportionately affected by such crises.
The report said this impact has significant consequences for income distribution and poverty. It added that policymakers had mostly turned to broad-based, untargeted measures during previous crises, while countries adopted different policy approaches.
Economies diverge in their support choices
Advanced economies tended to focus more on price-based measures closer to the final consumer and on direct income support.
Emerging-market economies and low-income developing countries, meanwhile, relied more heavily on policies such as producer subsidies, price controls, and broad-based increases in wages and pensions.
IMF recommends temporary transfers
The IMF said targeted, temporary income transfers are the most cost-effective and effective way to protect the most vulnerable groups from price increases. It noted that this approach preserves price signals, facilitates the demand adjustment needed by the market and safeguards countries' fiscal space.
Broad-based measures that suppress prices create much higher costs than targeted transfers while providing the same level of protection, the report noted. It added that subsidies can lose their effectiveness in countries with limited fiscal space, while their simultaneous adoption by many countries can drive up global prices and produce the opposite result.
The report stressed that policymakers should favor temporary income support directed at the most vulnerable households over broad-based subsidies. It said broad-based measures should be used only under exceptional conditions, when the crisis is extremely severe, identifying vulnerable households has become difficult and fiscal space allows it.
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