The International Monetary Fund (IMF) has warned that persistently high service sector inflation could keep interest rates high for a long time.
“The pace of global de-inflation is slowing, signaling difficulties ahead,” the Washington-based IMF said in its latest assessment of the world economy.
“This reflects developments in different sectors. Services price inflation remains higher than average but is somewhat mitigated by strong deflation in commodity prices,” it said.
Higher price growth in the services sector is linked to rising wages as workers seek “real wage catch-up” after periods of high inflation. Service-related businesses generally employ many employees, so wages tend to account for a large share of costs.
European Central Bank policymakers cut interest rates last month but have warned that rising service-sector inflation due to rising wages could limit further cuts, and are not expected to cut rates further when they meet this week.
“Further challenges to containing inflation in advanced economies may force central banks, including the Federal Reserve, to keep borrowing costs high for longer,” IMF chief economist Pierre-Olivier Grunschas wrote in a blog accompanying the report.
“This would lead to stronger dollar pressures, with negative spillovers to emerging and developing countries and putting overall growth at risk,” he said.
The IMF also warned in its report that escalating global trade tensions could drive up the cost of imported goods through supply chains, further exacerbating short-term inflation risks. Cross-border trade restrictions have proliferated, “adversely affecting trade between distant geopolitical blocs,” it said.
US presidential candidate Donald Trump has made no secret of his plans to build a tariff wall, or “ring” wall, around the US economy if elected.
The IMF forecasts global economic growth of 3.2% this year and 3.3% next year.
“The global economy and world trade remained strong through the end of the year, with strong exports from Asia, particularly in the technology sector, stimulating trade,” the report said.
It noted that global economic growth in many countries and regions rose faster than expected in the first quarter, but the United States and Japan saw “weaker than expected” growth.
“In the United States, growth slowed more sharply than expected after a long period of strong performance, reflecting weaker consumption and a negative contribution from net trade,” the report said.
“In contrast, Europe has begun to show signs of economic recovery, led by an improvement in services activity,” the IMF said.
The report forecasts that the euro area economy will grow modestly by 0.9 percent in 2024 (an upward revision of 0.1 percentage point) thanks to stronger momentum in the services sector and better-than-expected net exports in the first half of the year.
Growth is forecast to rise to 1.5% in 2025, driven by increased consumption due to rising real wages.
In the United States, projected growth this year has been revised down to 2.6 percent to reflect a slower-than-expected start, and is now expected to slow to 1.9 percent in 2025 due to a “cooling labor market and slowing consumption.”