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Dear maria, Welcome to the Weekend Read! In today's edition we focus on the varied landscape for inflation, the need to improve a debt relief initiative, the pros and cons of domestic debt restructuring, our new F&D issue on global health and well-being, Algeria's recovery, the growing global financial safety net, and much more. Inflation (photo: unsplash) Inflation's Varied Landscape Inflationary pressures are intensifying, and the Omicron variant is generating new uncertainties around the world. Monetary policymakers are facing new and challenging tradeoffs that differ from country to country, the IMF's Tobias Adrian and Gita Gopinath write in a new blog. In the United States, where there has been a strong recovery, a tight labor market, and broad-based inflationary pressures, it would be appropriate for the Federal Reserve to accelerate the taper of asset purchases and bring forward the path for policy rate increases, the authors write. --Getting to the core: Core inflation, a measure that strips out more volatile fuel and food inflation, has risen most sharply in the US, followed by the United Kingdom and Canada, among advanced economies. In the euro area and Asian countries like China, Indonesia and Japan, core inflation remains below central bank targets. Among emerging markets, core inflation has risen above targets in Russia, India and Brazil and is dramatically elevated in Turkey. --Higher for longer: The risks of a further acceleration of inflation are materializing as supply disruptions and elevated demand are lasting longer than expected. Supply-demand imbalances are still expected to wane in 2022, but continuing a monetary policy stance aimed at supporting recovery could fuel substantial and persistent inflationary pressures. In countries where economic recovery is further along and inflationary pressures more acute it would be appropriate to accelerate the normalization of monetary policy. Adrian and Gopinath urge major central banks to carefully communicate their policy actions "so as not to trigger a market panic that would have deleterious effects not just at home but also abroad, especially on highly leveraged emerging and developing economies." Read the Blog Debt (Photo: YOH4NN by Getty Images) Averting the Next Debt Crisis About 60 percent of low-income countries are at high risk or already in debt distress, a rate that has more than doubled since 2015. The G20 Debt Service Suspension Initiative will soon expire and interest rates are poised to rise. Low-income countries are facing a future in which it will be increasingly difficult to service their debts.  IMF Managing Director Kristalina Georgieva and the IMF Director of Strategy, Policy and Review Ceyla Pazarbasioglu make the case in a new blog for improving the G20's Common Framework for debt treatments--a longer-term initiative to help countries restructure their debt and deal with insolvency and protracted liquidity problems.  "The Common Framework is yet to deliver on its promise. This requires prompt action," the authors write, adding that recent experiences with Chad, Ethiopia, and Zambia show that improvements are needed. --No time to waste: Policy space is only tightening for highly indebted countries. Georgieva and Pazarbasioglu recommend four steps to help the process: Improve clarity on the different steps and timelines in the Common Framework process, alongside earlier engagement of official creditors with the debtor and with private creditors. Consider a comprehensive and sustained debt service payment standstill for the duration of the negotiation. This would provide relief to the debtor at a time when it is under stress, as well as incentivize faster procedures to get to the actual debt restructuring. The Common Framework should clarify further how the comparability of treatment will be effectively enforced, including as needed through implementation of the IMF arrears policies. The Common Framework should be expanded to other highly-indebted countries that can benefit from creditor coordination.  Read the Blog   (Photo: bCracker by Getty Images) Domestic Debt Restructuring: Handle with Care Restructuring domestic debt is like surgery: You only do it if you must, and you avoid it if it might do more harm than good, the IMF's Peter Breuer, Anna Ilyina, and Hoang Pham write in a new blog. Over the past two decades, emerging market developing economies have seen their share of sovereign domestic debt—“domestic debt” for short—increase from 31 to 46 percent of their total sovereign debt. Thus, restructuring of domestic debt is likely to play a role in the resolution of future debt crises. A new IMF paper draws on the past 40 years of sovereign debt restructurings to offer some insights into the key considerations for a domestic debt restructuring that restores debt sustainability while minimizing the disruption caused. --A different kind of debt: To date, much of the Fund’s and academic work on sovereign debt problems has focused on the implications of restructuring sovereign external debt (as noted above), by altering the terms of the debt such as the amount owed or the repayment period through negotiations with different types of external creditors. But, highlighted in the paper, restructuring debt issued under domestic law is different. Read the Blog F&D Magazine New F&D Issue: Safeguarding Global Health Good health is the foundation on which to build—a life, a community, an economy. In our Winter 2021 issue of F&D Magazine we focus on safeguarding global health and well-being. The COVID-19 pandemic has exposed gaps in international cooperation and forced a rethink of public health systems. It has also made us reconsider what defines a healthy society. The crisis has shown the inextricable link between health, both physical and mental, and the economy. “The depth of the pandemic’s shock—and the lessons from it—will perhaps spur individual countries and the international community to treat health as a public policy priority that will make for happier and more productive societies. As Mahatma Gandhi said, ‘Health is the real wealth…,’” writes F&D editor-in-chief Gita Bhatt. Our latest issue features articles by World Trade Organization chief Ngozi Okonjo-Iweala, Singapore’s senior minister Tharman Shanmugaratnam, and Harvard’s Larry Summers; Nobel Laureate Michael Kremer; World Health Organization head Tedros Adhanom Ghebreyesus; IMF Chief Economist Gita Gopinath, among many others. Read the Full December Finance & Development Issue. Want to get a print copy delivered to your home or office? Click here.   ️ F&D Podcasts: Listen to two new podcasts with F&D contributors. Economist Miles Kimball discusses alternative ways to measure national well-being beyond GDP. Read the F&D article he co-authored. The Global Fund's Peter Sands discusses the role of macroeconomics in public health preparedness in an interview with the IMF's Ruchir Agarwal. Read the F&D article.   (photo: Leonid Andronov)   Algeria at a Crossroads The Algerian economy is gradually recovering. Our latest Country Focus looks at how the government cushioned the shock of the pandemic even as the crisis exacerbated the economy's longstanding imbalances. Algeria has a unique opportunity to rebuild resilience and harness the potential from its dynamic youth.   (photo: IMF Photo/Saiyna Bashir)   Making Digital Money Work The rapid growth of digital money is a call to action to ensure that new technologies benefit all. Visit our IMF eLibrary section on Fintech to read the latest IMF work relating to the digital economy. While you're there, check out other sections covering everything from capital flows to risk management. Quote of the Week “Political views, even when your [economic] position changes or fluctuates, are very, very persistent. But other views, like your perceived fairness of inequality, tends to fluctuate when your [economic] position fluctuates. And when you look at people's views after they experience positive events or negative events that changes their position.” —Stefanie Stantcheva, professor, Harvard University during her presentation at the annual Richard Good Lecture. WEEKLY ROUND-UP 01. Changes at the Top IMF First Deputy Managing Director Geoffrey Okamoto will leave the Fund early next year and Gita Gopinath, currently the IMF’s Chief Economist, is proposed to take his place, the IMF announced this week. “Both Geoffrey and Gita are tremendous colleagues—I am sad to see Geoffrey go but, at the same time, I am delighted that Gita has decided to stay and accept the new responsibility of being our FDMD,” IMF Managing Director Kristalina Georgieva said. Gopinath had been scheduled to return to her academic position at Harvard University in January 2022. 02. How People View the Economy In this year’s Richard Goode Lecture, Stefanie Stantcheva of Harvard University and founder of the Economics Social Lab presented her latest research on the impact of individual perceptions of social position, intergenerational mobility and immigration on redistribution preferences. In her discussion with IMF Managing Director Kristalina Georgieva, she also shared her views on beliefs about social mobility, diversity and immigration, social position, our perceptions of ‘fairness’ and an understanding of how policy work all play a role in shaping public opinion and support for economic policies. Watch the event. 03. New Monetary Policy Tools How should Emerging Market and Developing Economy (EMDE) central banks design strategies for exiting from unconventional monetary policy? Where central banks have provided direct financing to their governments, how can their independence be safeguarded?  Under what conditions could EMDE central banks consider using balance sheet expansion to boost the macroeconomy, similar to the quantitative easing programs of many advanced economies? An event this week featuring South African Reserve Bank Governor Lesetja Kganyago, Bank of Russia Governor Elvira Nabiullina, and World Bank Chief Economist Carmen Reinhart, and moderated by the IMF's Tobias Adrian set out to answer these questions. Watch it here. 04. Supporting Caribbean Economic Capacity  On December 2, the IMF’s Caribbean Regional Technical Assistance Centre (CARTAC) hosted a Steering Committee celebrating 20 years of CARTAC. Committee Chair Timothy N. J. Antoine, Governor of the Eastern Caribbean Central Bank (ECCB), stressed that CARTAC had effectively supported economic performance in the Caribbean, with a particular focus on debt management, financial stability, customs administration, economic statistics, tax administration, climate resilience, gender equality, and more. He also thanked the IMF’s development partners for their crucial support to CARTAC 23 member countries, in particular Canada, the European Union, Mexico, the Netherlands, the United Kingdom, the United States, the Caribbean Development Bank, and ECCB. You can read more on CARTAC’s latest activities here.     MARK YOUR CALENDAR 01. Global Forum on Competition IMF Managing Director Kristalina Georgieva will deliver the keynote address at the opening session of the virtual OECD Global Forum on Competition on December 6. The opening session is open to the public and will be livestreamed on YouTube. The Forum is a three-day event from December 6-8, 2021, and is focused on trade, development, and competition. In our latest chart of the week, by the IMF's  Alina Iancu, Seunghwan Kim, and Alexei Miksjuk, we look at how the global financial safety net has expanded significantly over the past decade. The chart, drawn from the recent IMF Special Series on COVID-19, shows that since the global financial crisis, the total stock of international reserve holdings more than doubled, reaching about $14 trillion by end-2020. Other layers of the safety net increased about tenfold, to about $4 trillion. This increase reflects the expansion of the bilateral swap arrangements during the global financial crisis and the recent pandemic, as well as the establishment of new regional financial arrangements, especially in Europe (e.g., the European Stability Mechanism) and in South East Asia (the Chiang Mai Initiative Multilateralization). The IMF also more than doubled available resources in the aftermath of the global financial crisis. Adam Behsudi Editor IMF Weekend Read abehsudi@IMF.org

Dear maria, We just published a new blog—please find the full text below.  Addressing Inflation Pressures Amid an Enduring Pandemic (photo: unsplash) By Tobias Adrian and Gita Gopinath With inflationary pressures intensifying and Omicron generating new uncertainties, monetary policymakers are facing new and challenging tradeoffs. The resurgence of the pandemic and the latest variant, Omicron, have sharply increased uncertainty around global economic prospects. This comes as several countries grapple with inflation well above their monetary policy targets. It is however evident that the strength of the economic recovery and magnitude of underlying inflationary pressures vary significantly across countries. Accordingly, policy responses to rising prices must be calibrated to the unique circumstances of individual economies. We see grounds for monetary policy in the United States—with gross domestic product close to pre-pandemic trends, tight labor markets, and now broad-based inflationary pressures—to place greater weight on inflation risks as compared to some other advanced economies including the euro area. It would be appropriate for the Federal Reserve to accelerate the taper of asset purchases and bring forward the path for policy rate increases. Over time, if inflationary pressures were to become broad-based in other countries, more may need to tighten earlier than currently expected. In this environment it is essential for major central banks to carefully communicate their policy actions so as not to trigger a market panic that would have deleterious effects not just at home but also abroad, especially on highly leveraged emerging and developing economies. Needless to say, given the extremely high uncertainty, including from Omicron, policymakers should remain agile, data-dependent, and ready to adjust course as needed. The global inflation landscape Rising energy and food prices have fueled higher inflation in many countries. These global factors may continue to add to inflation in 2022, especially high commodity food prices. This has particularly negative consequences for households in low-income countries where about 40 percent of consumption spending is on food. A measure of inflation which strips out volatile fuel and food inflation, so-called core consumer price inflation has also risen but exhibits significant variation across countries. Some of the increase in core inflation in countries reflects reversals of price falls in 2020, such as from the unwinding of VAT tax cuts in Germany. It therefore helps to focus on annualized cumulative inflation since pre-pandemic. By this measure, core inflation among advanced economies has risen most sharply in the United States, followed by the United Kingdom and Canada. In the euro area the increase is much less so. There are also limited signs of core inflationary pressures in Asia, including in China, Japan and Indonesia. Among emerging markets, core is dramatically elevated in Turkey. Median inflation, a measure that is not affected by exceptionally large or small price changes in a few categories of goods and therefore conveys the breadth and likely persistence of price pressures, similarly varies across countries. The recent rise in median inflation for the United States to around 3 percent in October is also higher than for other Group of Seven countries. While inflation is likely to remain elevated well into 2022 in several countries, measures of inflation expectations for the medium and long-term remain close to policy targets in most economies. This reflects, in addition to expectations of waning inflationary forces, that policy actions can bring inflation back to target. In the United States, long-term inflation expectations have increased but remain close to historic averages and thus appear well-anchored. Euro area expectations have increased but from levels well below target to now close to it, which suggests long-term expectations may have become better anchored to the European Central Bank’s 2 percent objective. For Japan, inflation expectations remain well below the target. For several emerging markets, including India, Indonesia, Russia, and South Africa, expectations show signs of being anchored. Exceptions include Turkey, where the risk of inflation expectations becoming unmoored is apparent as monetary policy is eased despite rising inflation. Sources of price pressures The rise in core inflation reflects multiple factors. Demand has rebounded strongly supported by exceptional fiscal and monetary measures, especially in advanced economies. In addition, supply disruptions caused by the pandemic and climate change, and a shift in spending toward goods over services have increased price pressures. Furthermore, wage pressures are apparent in some segments of labor markets. The United States has experienced a more prolonged reduction in labor-force participation relative to other advanced economies, further adding to wage and inflationary pressures. We expect the mismatch in supply and demand to attenuate over time reducing some price pressures in countries. Under the baseline, shipping delays, delivery lags, and semiconductor shortages will likely improve in the second half of 2022. Aggregate demand should soften as fiscal measures come off in 2022. That said, it’s important to keep in mind that economic activity has rebounded quickly in several countries, with the United States experiencing the fastest recovery among large, advanced economies. It is in such countries, where economic activity has rebounded more quickly to pre-pandemic trends, that core inflation has risen sharply relative to levels before the crisis. This relationship between recovery strength and core inflation, while far from perfect, suggests stronger underlying inflationary pressures in countries where demand has recovered the fastest. Varied policy action At the onset of the pandemic, policymakers around the world were synchronized in dramatically easing monetary policy and expanding fiscal policy. These actions helped prevent a global financial crisis, despite lockdowns and health shocks causing a historic recession. The confluence of very low inflation and weak demand provided a strong rationale for easy monetary policies. Earlier this year, when inflation picked up sharply, it was driven by exceptionally high inflation in a few sectors such as energy and autos, much of which was expected to reverse by the end of the year as pandemic related disruptions declined. Central banks, with a long track record of keeping inflation low and stable could appropriately “look through” the runup in inflation and keep interest rates low to support the economic recovery. However, risks of a further acceleration of inflation previously flagged in our global publications and country-specific reports are materializing, with supply disruptions and elevated demand lasting longer than expected. Inflation is likely to be higher for longer than previously thought, which means that real rates are even lower than before, implying an increasingly expansionary stance of monetary policy. While we still anticipate that supply-demand imbalances will wane next year, a singular focus of monetary policy on supporting recovery may well fuel substantial and persistent inflationary pressures, with some risk of de-anchoring inflation expectations. Accordingly, in countries where economic recoveries are further along and inflationary pressures more acute it would be appropriate to accelerate the normalization of monetary policy. Potentially challenging spillovers The challenge of addressing large and persistent supply shocks is even greater for emerging market central banks. Given the greater risk to de-anchoring of inflation expectations relative to advanced economies, they see the need to get ahead of inflationary pressures and some—such as Brazil and Russia—have raised policy rates sharply. Such tightening comes amid large COVID-related output shortfalls and could further depress output and employment. Emerging markets face potentially challenging spillovers if tightening by advanced economies causes capital outflows and exchange rate pressures that could require them to tighten even more. Lastly, there remains tremendous uncertainty around the evolution of the pandemic and on its economic consequences. A variant that significantly reduces vaccine efficacy could lead to further supply chain disruptions and contractions in labor supply pushing up inflationary pressures, while lower demand could have opposing effects. The sharp fall in oil prices following the discovery of Omicron and the rapid imposition of travel restrictions by countries is a sign of the volatility ahead. In sum, policymakers must carefully calibrate their response to incoming data. Varying inflation conditions and strength of recoveries across countries show why the policy response needs to be tailored to country specific circumstances, given sharply higher uncertainty associated with Omicron. Clear central bank communication, too, is key to fostering a durable global recovery. As we warned in recent reports such as the World Economic Outlook, a more frontloaded Fed response to dampen inflation risks could result in market volatility and create difficulties elsewhere—especially in emerging and developing economies. To avoid that, policy shifts need to be telegraphed well, as has so far been the case. Emerging market and developing economies should also prepare for increases in advanced economy interest rates through debt maturity extensions where feasible, thereby reducing their rollover needs, and regulators should also focus on limiting the buildup of currency mismatches on balance sheets. ***** Related links: Inflation Scares in an Uncharted Recovery Recovery During a Pandemic Latin America’s Inflation Challenge A Hobbled Recovery Along Entrenched Fault Lines Glenn Gottselig Managing Editor IMF Blog ggottselig@IMF.org