IMF warns of ongoing inflation risks despite progress

The Chief Economist of the International Monetary Fund (IMF), Pierre-Olivier Gourinchas, has warned that the fight against inflation could falter due to persistently high prices in the services sector. This could dash hopes for an early reduction in interest rates. Gourinchas stated in an interview with the Financial Times that officials should continue to expect "uncertainties" and that price increases in the services sector on both sides of the Atlantic are "stubborn." Gourinchas' comments come at a time when central banks are preparing to ease monetary policy. The European Central Bank has already implemented an interest rate cut, while the Federal Reserve and the Bank of England are planning similar actions in the coming months. However, the IMF cautioned that ongoing price pressures could delay a return to lower borrowing costs. Global inflation is not expected to reach the 2-percent target until the end of 2025. Despite these concerns, investors expect the Fed to make its first interest rate cut in September, following signals of progress in inflation data from Chairman Jay Powell and other U.S. policymakers. The IMF highlighted the risks associated with higher interest rates, including external, fiscal, and financial risks, and pointed to the possibility of "significant fluctuations" in economic policy due to elections worldwide. Another point of Gourinchas' warning concerns the increasing trade conflicts. Republican presidential candidate Donald Trump plans a 10-percent tariff on all imports and a 60-percent fee on imports from China. These protectionist measures could cause "harmful cross-border spillover effects" and trigger a costly "downward spiral," according to the IMF. Despite these challenges, the IMF expects global trade to increase by 3.25 percent this year. Global growth is forecasted at 3.2 percent this year and 3.3 percent in 2025. The U.S. economy is expected to grow by 2.6 percent in 2024 and 1.9 percent in 2025, while growth in the euro area is projected to rise to 1.5 percent in 2025. For the United Kingdom, growth of 0.7 percent is anticipated this year and 1.5 percent in 2025. Projections for China have been raised to 5 percent in 2024 and 4.5 percent in 2025.