Why the decline in global inflation has stalled

While the U.S. economy shows tentative signs of cooling, the eurozone is expected to grow strongly again in 2025. The International Monetary Fund (IMF) says inflation risks remain significant.

On Tuesday, the International Monetary Fund (IMF) released its latest global economic forecasts. The outlook for this year remained unchanged at 3.2%, and the global economy is expected to grow by 3.3% next year, even slightly higher than expected in April. At that time, IMF economists assumed economic growth of 3.2% in 2025. India and China account for half of the global growth.

While the US economy, which has so far shown remarkable resilience to the crisis, is showing the first signs of cooling, IMF experts expect the eurozone to return to higher growth. Next year, US economic output is expected to grow by 1.9%, while the forecast for this year has been revised down by 0.1 percentage point to 2.6%. For the eurozone, IMF experts expect economic growth of 0.9% this year, up 0.1 percentage point from April. In 2025, the currency area will expand by 1.5%.

Inflation risks increase

The IMF largely maintained its April forecasts, with a few exceptions, such as Saudi Arabia, where IMF experts slightly downgraded their growth outlook, and China, where the forecasts for 2024 and 2025 were each raised by 0.4 percentage points. Calculations have not yet been made for all countries, including Austria.

In any case, forecast updates that are not related to changes in economic performance are more relevant to the current update. Short-term inflation risks are particularly prominent, IMF Chief Economist Pierre-Olivier Gurinchas told reporters on Tuesday. The decline in inflation is mainly due to high service prices. Normalization is still far away, also because the recent trend in the United States is not quite right.

What might drive inflation?

Geopolitical tensions could also be a driver of inflation. For example, trade conflicts could increase import costs and therefore prices. The International Monetary Fund has warned that cross-border trade barriers have increased recently. For example, the European Commission temporarily imposed high special tariffs on electric vehicles from China. Countermeasures from the People’s Republic of China are now expected. The United States has also launched new tariffs on China. Escalation of trade disputes is one of the short-term risks.

Global inflation is now expected to be 5.9% this year and 4.4% next year, up from 6.7% in 2023. Gurinchas stressed that the trend is positive because there is no recession. The bad news is that although prices of important parts such as energy and food are almost back to pre-pandemic levels, overall inflation remains high. Slowly falling inflation also means that monetary policy will remain restrictive for longer and interest rates will fall more slowly.

The Fed is in no rush

Despite falling U.S. inflation, the central bank (FedFrom Gurinchas’s perspective, he told Reuters: “The June data is good, but let’s look at the July and August data, U.S. consumer price inflation was 3% in June,” no longer as sharp a rise as in May (3.3%) and April (3.4%).