IMF sees ‘bumps’ on the road to lower inflation
The International Monetary Fund warned Tuesday that upside risks to inflation have increased, casting doubt on the prospect of multiple interest rate cuts by the Federal Reserve this year.
In its latest update to the World Economic Outlook, the IMF said that “the momentum of global disinflation is slowing, signaling bumps ahead.” The rise in sequential inflation in the United States in early 2024 has put it behind other major economies on the path of quantitative easing, the report said.
The report comes as traders increase their bets on a Federal Reserve rate cut in September. According to CME Group’s FedWatch tool, Wall Street has priced in a 100% chance of lower rates at the Sept. 18 meeting. Traders also expect another rate cut in November.
However, IMF chief economist Pierre-Olivier Gourinchas told CNBC’s “Squawk on the Street” on Tuesday that a Fed rate cut is most appropriate this year, highlighting persistent services and wage inflation as complications on the path to lower inflation.
Gourinchas said that while robust wage and services inflation are “not necessarily a source of concern,” they are points of concern for the U.S. economy. His comments came after the U.S. Labor Department said the consumer price index grew last month at its slowest year-over-year pace since April 2021.
Despite the encouraging CPI report, Gourinchas said the pick-up in inflation at the beginning of the year indicates that the path to lower inflation and rate cuts “could take a little longer than perhaps the markets expect.”
“We are more inclined to think that there could be some cuts in the latter part of the year, but maybe just one, or in 2024 and maybe the rest of 2025,” Gourinchas said.
In the world’s advanced economies, the IMF expects the rate of disinflation to slow in 2024 and 2025 due to broadly elevated inflation in services and commodity prices.
As for the US economy, the financial institution lowered its growth outlook by 0.1 percentage points to 2.6% in 2024 due to cooling consumption and slower growth than expected at the beginning of the year.