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Could the global economy be witnessing the final stage of the inflationary cycle that started in 2021?
Recent data have sparked hope of a “touchdown” of inflation, the International Monetary Fund said Tuesday, in a new update to its World Economic Outlook released Tuesday.
“Stronger growth and lower inflation than expected are welcome news, suggesting
the global economy is headed in the right direction,” said Pierre-Olivier Gourinchas, the IMF’s chief economist, in a blog accompanying the report.
As is often the case, there are more risks that the economy will stumble and disappoint, rather than surprise to the upside.
“Challenges still cloud the horizon, and it is too soon to celebrate,” Gourinchas said.
The IMF only tweaked its formal outlook.
Under the baseline forecast, the IMF forecasts the global economy will slow from last year’s 3.5% rate to 3% rate this year and next. Growth this year was revised up by 0.2 percentage points.
The euro zone and the United Kingdom are relatively weak among the advanced economies.
Global inflation is projected to decline from a 8.7% rate last year to 6.8% rate this year, 0.2 percentage points lower than expected, and continue down to a 5.2% rate in 2024.
What are the risks?
Signs are growing that global activity is losing momentum, as the rapid increase in interest rates is starting to bite.
In the U.S., excess savings “are all but depleted,” the IMF said.
In China, the economy is showing signs of losing steam amid continued concerns about the property sector.
And core inflation, which excludes food and energy prices, is looking stubborn in the most developed economy. It is expected to remain unchanged at 5.1% in 2023 from last year. It will start to move lower next year, to a 3.1% rate, the IMF said.
“Clearly, the battle against inflation is not yet won,” Gourinchas said.
The key to the persistence of inflation will be labor market developments and wage-profit dynamics, the IMF said.
“Greedflation” isn’t the villan, Gourinchas said. Wage inflation has lagged behind price inflation in most places because “prices adjust upward faster than wages” when demand exceeds what the economy can produce.
In an optimistic note, Gourinchas said there was room for higher wages without triggering higher prices, known as a wage-price spiral.
