Cost-of-living shocks can leave essentials persistently less affordable, keep inflation expectations elevated, and deepen hardship for poorer households, according to new analysis by the International Monetary Fund. The research argues that temporary, targeted income support generally offers stronger protection per unit of public spending than broad price subsidies, while recognising that wider measures may sometimes be needed in exceptional circumstances.
The analysis appears in the second chapter of the IMF’s October 2026 World Economic Outlook, titled “Navigating a Shock-Prone World: Lessons from Cost-of-Living Crises”. Its accompanying policy discussion was published on 6 October, ahead of the full report’s scheduled release on 13 October. It draws on policy data covering 76 countries over three decades and a model of household-specific inflation.
Why essential-price shocks linger
Food and energy prices can rise faster than other prices and wage growth during a cost-of-living crisis. Because households cannot readily stop buying necessities or replace them with alternatives, the initial shock can have effects long after the immediate price surge.
The IMF says relative prices for necessities continue increasing for more than a year after a typical crisis begins and remain persistently elevated. Inflation also stays higher well beyond the initial food and energy shock. Near- and medium-term inflation expectations rise and remain above their pre-crisis levels, while real wages and purchasing power fall and take time to recover.
The distributional impact is uneven. Lower-income households devote a larger share of their budgets to food and energy, so they experience higher inflation than wealthier households when those prices surge. The IMF says resulting effects on poverty and inequality are particularly substantial in lower-income countries, where necessities account for an even greater portion of poorer families’ spending.
In a separate estimate reported alongside the chapter’s release, the IMF’s new model produced an inflation measure 0.8 percentage points above the standard measure. Applying that difference to the period from 2021 to 2024 suggested that 23 million more people fell below the extreme-poverty line than previously calculated. These are model-based estimates, not a direct count of newly identified individuals.
Different forms of government support
The review of 76 countries found that governments have often tried to suppress price rises directly. Advanced economies more commonly cut value-added or excise taxes on food and energy. Emerging and low-income economies more frequently used upstream measures such as producer subsidies, customs-duty reductions and price controls, in part because informal retail markets are more prevalent. Governments also offered direct transfers; poorer countries more often increased wages or pensions broadly.
Those approaches can provide immediate relief, but the IMF’s model suggests substantially different costs for delivering comparable protection to lower-income households. Consumer subsidies could require three to six times as much public spending as targeted transfers, while producer subsidies could cost 14 to 22 times as much. These model-based estimates are not universal forecasts.
The analysis also points to the distribution of support during Europe’s 2022–23 energy crisis: for every euro spent suppressing electricity, natural-gas and petrol prices, less than 20 cents reached the poorest fifth of households. Broad price suppression can benefit higher-income consumers who use more energy, weaken incentives to conserve scarce goods and, if adopted by many countries at once, add to global demand and prices. Producer support may also lower costs for exported goods, meaning some of the benefit goes to consumers abroad.
Targeting, with room for exceptions
The IMF’s preferred approach is temporary support directed to households most exposed to the shock, ideally through social-protection systems that can be expanded quickly. Transfers can protect purchasing power while allowing market prices to signal scarcity and preserving limited fiscal room for other needs. Strengthening those systems before a crisis, the analysis says, can improve governments’ ability to respond.
The recommendation is not presented as an absolute rule. The IMF says wider assistance may be justified where food security is acutely threatened, social unrest risks are heightened, or administrative constraints make targeting difficult, provided governments have fiscal space. If price measures cannot be avoided, they should be narrowly focused, limited in duration and designed to retain as much of the underlying price signal as possible.
The findings are policy analysis rather than a prescription for every national circumstance. Their central trade-off is that broad subsidies may suppress visible prices quickly, but can consume far more public money while directing a smaller share of support to the households most in need.
