IMF Warns of Inflation Challenges Ahead

The International Monetary Fund (IMF) has raised concerns about increasing inflation risks, which may hinder the likelihood of multiple interest rate cuts by the Federal Reserve this year. In its latest World Economic Outlook update, the IMF noted that the momentum for global disinflation is slowing, indicating potential challenges ahead. The report highlights that the U.S. has fallen behind other major economies in terms of quantitative easing, particularly following a rise in sequential inflation earlier in 2024. As traders anticipate a Federal Reserve rate cut in September, the CME Group's FedWatch tool indicates a 100% probability of lower rates at the upcoming meeting on September 18. Additionally, expectations for another rate decrease in November are also prevalent. However, IMF chief economist Pierre-Olivier Gourinchas suggested that only one rate cut may be appropriate this year, citing persistent services and wage inflation as complicating factors for achieving lower inflation. Despite a recent report from the U.S. Labor Department showing the consumer price index (CPI) growing at its slowest year-over-year pace since April 2021, Gourinchas warned that the recent uptick in inflation could prolong the timeline for rate cuts. He indicated that while there may be some cuts later this year, the focus may shift to 2024 and beyond. Globally, the IMF forecasts a slowdown in disinflation rates for advanced economies in 2024 and 2025, driven by high service inflation and commodity prices. For the U.S. specifically, the IMF has revised its growth outlook down by 0.1 percentage points to 2.6% for 2024, reflecting cooling consumption and slower-than-expected growth at the year's start.