The IMF declares that the global battle against inflation is "almost won," but cautions about increasing dangers.

• By the end of 2025, the International Monetary Fund predicts that global headline inflation will decrease from 5.8% in 2024 to 3.5% year-over-year.
• Rising market volatility was among the risks the agency highlighted to global growth
• A spike in commodity prices would especially hurt lower-income nations, the IMF added

The annual global headline inflation rate is expected to decrease from 5.8% in 2024 to 3.5% by the end of 2025, according to the agency's World Economic Outlook released on Tuesday. Inflation reached its peak at a year-over-year rate of 9.4% in the third quarter of 2022. The yearend 2025 rate is slightly below the average annual increase in prices over the past 20 years.

The IMF declared that the global fight against inflation is almost over, while simultaneously urging a "policy triple pivot" to tackle interest rates, government spending, and reforms and investment to enhance productivity.

The IMF chief economist, Pierre-Olivier Gourinchas, stated that although inflation is improving, the increasing downside risks are now the main concern, and they are dominating the outlook. However, with inflation moving in the right direction, global policymakers are facing a new challenge due to the rate of growth in the world economy, as the IMF has warned.

Vigilance needed in final stretch of disinflation

The IMF, a global financial organization with 190 member countries, stated in its report that a responsive monetary policy was crucial in reducing inflation, normalizing labor market conditions, and unwinding supply shocks, which helped prevent a global recession.

The report cautioned that central banks must remain vigilant in reducing inflation, which is still nearly double pre-pandemic levels due to rising wages in certain countries and an increase in the cost of living. This has led to inflationary pressures in emerging market economies such as Brazil and Mexico.

The report stated that although inflation expectations have remained stable this time, it may be more challenging next time, as workers and firms will be more cautious in safeguarding their living standards and earnings in the future.

Households in lower-income countries are more vulnerable to price spikes in food and energy, which can increase inflation and exacerbate the stress of sovereign debt repayments.

Market volatility among key downside risks

The IMF report stated that heightened financial volatility is another threat to global growth. The report cited sudden market sell-offs, such as those that occurred in early August, as a key risk that clouds the economic outlook. Although markets have steadied since the brief August slump, fueled by an unwinding of the yen carry trade and weaker-than-expected U.S. labor market data, worries remain, according to the fund.

The resurgence of financial market instability during the summer has rekindled concerns about underlying weaknesses. This has intensified apprehension about the optimal monetary policy approach, according to the report.

Inflation poses a significant challenge to global financial markets, and if it persists, it could lead to market turbulence and contagion, particularly in low-income countries already struggling with high debt and currency instability.

The IMF has identified several risks to global prosperity, including a potential deeper contraction of the Chinese property market, high interest rates for an extended period, and rising protectionism in international trade. Additionally, geopolitical tensions, particularly in the Middle East, and potential spikes in commodity prices pose downside risks.

The global growth rate is expected to decrease to 3.1% annually by the end of the 2020s, which is the lowest forecast in many years. Despite China's weaker outlook, the deteriorating outlook in Latin America and Europe is also affecting medium-term projections. Structural headwinds such as low productivity and aging populations are limiting growth prospects.

The IMF warned that slowdowns in emerging markets and developing economies could prolong the income gap between poor and rich countries. Additionally, if growth remains stagnant, it could intensify income inequality within economies.