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US inflation has not ‘turned the corner yet’, top IMF official warns

Inflation in the US has not “turned the corner yet” and it is too early for the Federal Reserve to declare victory in its fight against soaring prices, a top IMF official has warned.

In an interview with the Financial Times Gita Gopinath, the fund’s second-in-command, urged the US central bank to press ahead with rate rises this year despite a recent moderation in headline inflation following one of the most aggressive tightening campaigns in the Fed’s history.

“If you see the indicators in the labour market and if you look at very sticky components of inflation like services inflation, I think it’s clear that we haven’t turned the corner yet on inflation,” she said, adding that the fund’s advice to the Fed was to “stay the course”.

The comments from the fund’s deputy managing director come after a flurry of data suggested inflation in the US, Europe and other economies might have peaked, as energy prices fall from recent highs and the cost of goods such as home appliances and used cars starts to decline.

Chief among Gopinath’s concerns is the continued resilience of the US labour market, which on average is adding roughly 400,000 jobs each month. The unemployment rate still hovers near historic lows and an acute worker shortage has helped to push wage increases to a level that is far too high for the Fed to hit its 2 per cent inflation target.

Gopinath said it was “important” for the central bank to “maintain restrictive monetary policy” until there was a “very definite, durable decline in inflation” that was evident in wages and sectors not related to food or energy.

Despite fears among some economists and leftwing politicians that the Fed has already raised rates too aggressively, Gopinath said it was “hard” to argue that officials had tightened too much.

Gopinath backed the Fed’s benchmark rate rising to about 5 per cent and staying there throughout this year, in an effective endorsement of the latest “dot plot” projections from US central bank officials.

Minutes from the Fed’s latest meeting in December, published on Wednesday, showed officials think they must do more to throttle the US economy and stamp out inflation. Policymakers would need to see “substantially more evidence” of easing price pressures before they are confident the situation is under control, according to the account.

Her comments come as the global economy contends with multiple shocks, including an escalation of the war in Ukraine and the abrupt end of China’s zero-Covid policy.

Gopinath said she expects China’s economy to suffer significantly in the near term as it deals with rising hospitalisation and deaths, and warned the slowdown would have a negative impact on global growth. A rebound is possible later this year, however, as Chinese demand recovers, she added.

Kristalina Georgieva, the fund’s managing director, on Sunday said a third of the global economy will be hit by recession this year, including half of the European Union.

The IMF will release new growth forecasts this month but Gopinath said it was too soon to comment on the revisions. There is a “very narrow path” for the US to avoid a recession this year, she added.

Gopinath said she expects monetary tightening in Europe to stretch on for longer than the Fed’s, as officials grapple with the war-induced energy crisis.

“We are looking well into 2024 before we start seeing inflation coming closer to the ECB’s [2 per cent] target,” she said, adding that fiscal support implemented by European governments to tackle the cost of living crisis would prolong the process.

“It’s another challenging year for monetary policy, but it’s a different kind of challenge,” Gopinath said. “The last year was about quickly tightening monetary policy and how far to go. Now for lots of countries, the question is how long to stay on hold.”

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