The surge in food and energy prices during the past few years has fueled inflation and hurt growth. Prices of food and energy commodities increased steadily following the onset of the pandemic and reached historic highs after Russia’s invasion of Ukraine. While international prices have since moderated, they have nonetheless contributed to upward pressure on domestic inflation.Moreover, high energy prices have increased input and transportation costs, weighing on economic activity and feeding into higher food prices through production linkages. The result has been a cost-of-living crisis, with the most vulnerable economies and people particularly hard-hit and with a marked increase in food insecurity. In addition, empirical estimates highlight that the increased volatility of commodity prices is likely to weigh on medium-term growth and increase inflation volatility.

The current challenges could worsen if risks to the outlook materialize. A further erosion of real incomes could lower household spending and spark social unrest, harming livelihoods and growth. An extended disruption of the energy supply in Europe poses further downside risks. Moreover, unfavorable inflation developments could necessitate a sudden tightening of financial conditions from larger-than-expected further policy interest rate increases, raising borrowing costs for many economies that are already dealing with elevated debt levels. Further geoeconomic fragmentation could restrict trade and increase concentration risks in the energy supply, exacerbating food and energy security concerns.

Policymakers have responded amid difficult policy tradeoffs. Monetary policy has been tightened markedly in most G-20 economies to help bring down inflation. At the same time, fiscal measures have been implemented to ease the cost-of-living pressures, especially in Europe. However, in many economies, these measures have often been untargeted and aimed at suppressing the pass-through of higher international prices. Restrictions on trade have also been imposed in the attempt to ensure the domestic food supply. To address energy security concerns, some economies have scaled up reliance on fossil fuels, setting back the green transition.

Policy action is needed to tackle the on-going crisis and prepare for future shocks.

Domestic policies must stay focused on bringing down inflation and elevated debt levels while supporting the most vulnerable. This requires continued monetary policy tightening until inflation is brought down durably. Fiscal measures should be temporary and targeted, allowing price signals to operate to the extent possible, while avoiding acting against monetary policy. Measures aimed at ensuring energy security should be compatible with the green transition.
Multilateral efforts are urgently required to prevent further geopolitical fragmentation and strengthen the multilateral trade system. The removal of food export restrictions is necessary to ensure global food security. The green transition will also rely on the free flow of trade to avoid disruptions in markets for key transition-related primary inputs. And strengthening the global financial safety net is essential for building resilience against future shocks.