AI-generated illustration

The International Monetary Fund said cost-of-living crises erode real wages, weaken domestic demand and raise medium-term inflation expectations, in a chapter shared ahead of its World Economic Outlook report due on October 13. Sudden increases in the cost of essentials tend to persist, it said. Low-income households suffer disproportionately because necessities account for a larger share of their spending, with significant implications for poverty and income distribution.

The chapter found that policymakers had largely relied on broad, untargeted measures during past crises, although approaches varied substantially across countries. Advanced economies tended to favor price measures aimed at consumers and direct income support. Emerging markets and low-income developing countries leaned more heavily on producer subsidies, price controls and across-the-board increases in wages and pensions.

The IMF recommended temporary, targeted income transfers as the most effective and cost-efficient protection for vulnerable households. Such support preserves price signals, allows demand to adjust and safeguards fiscal capacity. Broad price-suppression measures cost considerably more to provide equivalent protection, while subsidies can push global prices higher when many countries introduce them simultaneously. The fund said broad measures should be reserved for exceptional cases in which crises are extremely severe, vulnerable households are difficult to identify and sufficient fiscal resources are available.

Key Takeaways

• Persistent increases in essential costs weaken purchasing power and domestic demand.
• Low-income households face a disproportionate burden from cost-of-living crises.
• The IMF favors temporary, targeted income support over broad subsidies.