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High services prices and escalating trade tensions are pushing up inflation, the IMF said in its latest World Economic Outlook.
CNN, London —
The International Monetary Fund warned that persistent inflation could keep interest rates higher for longer than expected, increasing fiscal and financial risks around the world.
High prices for services such as haircuts, hotels and restaurants, and escalating trade tensions are pushing up inflation and raising the prospect of interest rates remaining high for the foreseeable future, the IMF warned on Tuesday in its latest World Economic Outlook.
The warning highlights that the global economy has yet to stabilise when it comes to inflation and explains why central banks have been cautious in cutting interest rates, as rising borrowing costs prolong the financial squeeze on households and businesses.
Last week, Federal Reserve Chairman Jerome Powell said US central bankers needed “greater confidence” that inflation was moving sustainably towards their 2% target before enacting their first rate cut.
Meanwhile, the Bank of England refrained from cutting interest rates last month, even as UK inflation slowed to the central bank's 2% target in May, but services inflation rose faster than expected.
The Bank of England stressed that “monetary policy will need to remain tight for an extended period until there are no longer any risks of inflation exceeding the 2 per cent objective.”
The IMF said in a report on Tuesday that it still expects major central banks to cut borrowing costs in the second half of the year, and chief economist Pierre-Olivier Grunschas told reporters he expects the Fed to make one rate cut by the end of the year.
The IMF now expects global inflation to slow to 5.9% this year from 6.7% last year, in line with its April forecast.
The agency blamed rising service prices, partly due to rising wages, for “impeding progress” toward curbing overall inflation.
“While energy and food price inflation has almost returned to pre-pandemic levels in many countries, overall inflation has not,” Gorinchas said. “Increasing services prices and wages may keep overall inflation higher than desired,” he said, adding that this poses “significant risks” to economic growth.
Tariffs undermine living standards
The IMF also said rising trade tensions “could further increase near-term inflation risks due to higher import costs.”
The United States and the European Union have increased tariffs on Chinese-made electric vehicles in recent months over concerns that cheap Chinese imports could wipe out local jobs and strategic industries. The United States has also increased tariffs on a host of other products, including steel, batteries, semiconductors and critical minerals, from China, the world's second-largest economy.
Gorinchas said the “proliferation of unilateral measures” including tariffs was a “major concern” for the IMF.
“Rather, it will distort trade and resource allocation, encourage retaliation, weaken growth, lower living standards, and make it harder to coordinate policies to address global challenges like climate change,” he added.
The IMF sees the global economy growing 3.2% this year, in line with its April forecast, but the organization lowered its forecast for U.S. growth to 2.6%, 0.1% lower than its April forecast.
The economy, which includes the 20 countries that use the euro, is now expected to grow at a “moderate” 0.9 percent, 0.1 percentage point higher than forecast in April.
The IMF also revised up its 2024 growth forecasts for India and China, now seeing growth of 7% and 5%, respectively, from 6.8% and 4.6% projected in April. These two countries will account for half of global growth.
“Asia's emerging market economies remain the main engine of the global economy,” Gorinchas said.