Global inflation to fall to 7% this year – IMF forecasts
Global headline inflation is set to decline from its 2022 peak of 8.7 percent to 7.0 percent in 2023, according to the International Monetary Fund’s (IMF) latest analysis. The decrease is primarily driven by lower commodity prices, but underlying or core inflation is expected to decline more gradually. Despite this positive outlook, risks to the inflation forecast are heavily skewed to the downside, with the possibility of a hard landing having increased sharply.
One of the key risks to the outlook is financial sector stress, which has the potential to amplify and contagion could take hold, weakening the real economy through a sharp deterioration in financing conditions and forcing central banks to rethink their policy paths. In addition, pockets of sovereign debt distress could spread and become more systemic in the context of higher borrowing costs and lower growth. The ongoing conflict in Ukraine could also lead to food and energy price spikes, pushing inflation upwards.
Core inflation could turn out to be more persistent than anticipated, requiring even more monetary tightening to tame. Furthermore, the fragmentation into geopolitical blocs may generate significant output losses, including through its effects on foreign direct investment. Policymakers, therefore, face a challenging path to improve prospects and minimize risks.
Central banks need to remain firm with their tighter anti-inflation stance but must also be willing to adapt and use their full set of policy instruments, including addressing financial stability concerns as needed. Fiscal policymakers should reinforce monetary and financial policymakers’ actions in bringing inflation back to the target while ensuring financial stability. Governments should strive for an overall tight stance while providing targeted support to those most affected by the cost-of-living crisis.
It is noteworthy that the IMF’s analysis predicts that inflation’s return to target is unlikely to occur before 2025 in most cases, even though global headline inflation is set to fall in 2023. Policymakers must be ready for the challenges ahead, balancing competing objectives and responding flexibly to changing conditions.
While the global inflation outlook appears relatively positive, the risks remain high, and policymakers must remain vigilant. A steady and targeted approach to monetary and fiscal policy is needed, focusing on bringing inflation back to target while ensuring financial stability. Success will depend on policymakers’ ability to adapt quickly to changing conditions and strike a balance between competing objectives.
