Global Inflation & Interest Rates Projections 2023-2026

This economic analysis is synthesised from the World Economic Outlook 2025 Update, Global Financial Stability Report, Future of Jobs Report 2025, and Fiscal Monitor. The analysis highlights the macroeconomic outlook, financial stability risks, labor market trends, and fiscal policy projections for 2025.

Inflation & Interest Rates:

• Global inflation is expected to decline to 4.2% in 2025 and 3.5% in 2026, with advanced economies achieving targets faster than emerging markets .

• Interest rate differentials between the U.S. and other economies may widen, affecting capital flows and exchange rates.

• Risks:

• Policy-generated disruptions to disinflation could affect fiscal sustainability and financial stability.

• Trade protectionism could slow global growth.

• U.S. fiscal policy looseness may drive global capital demand, increasing interest rates.

Inflation Trends: Easing Pressures with Pockets of Persistence

The IMF’s outlook projected that global inflation would gradually decline through 2025, approaching central bank targets by 2025–26 . In fact, the WEO Update sees worldwide headline inflation falling to 4.2% in 2025 (from higher levels in 2023–24) . Thus far, this disinflation trend is materializing, though not without some bumps.

Projected decline: The WEO emphasized that global price pressures were set to ease as supply-demand imbalances improve and monetary tightening bites. It expected inflation to “converge back to target” somewhat faster in advanced economies than in emerging markets . This largely meant U.S. and Euro Area inflation dropping to ~2–3% by 2025, while many developing countries see their inflation fall into mid-single digits. IMF forecasters assumed fading energy costs and healing supply chains would help cool prices, while slower growth would temper demand-side inflation. Indeed, by Jan 2025 the IMF noted the “global median of core inflation” had steadied just above 2%, and goods price inflation had subsided to normal levels . However, they also cautioned that services inflation remained above pre-pandemic norms, and “progress is stalling in some countries” – a warning that victory over inflation was not yet assured.

Reality: In real time, inflation has been trending down in many major economies, matching the direction of IMF projections. For example, U.S. CPI inflation, which peaked at ~9% in 2022, was down to about 3–4% by late 2024, the lowest in two years. The Euro Area saw a similar pattern: from double digits in 2022 to about 4–5% by end-2024. This cooling reflects the unwinding of the pandemic supply shock – supply chains are mostly normalized and shipping costs back at pre-Covid levels, easing goods inflation dramatically. Key commodity prices also retreated from their highs. Global oil prices, which spiked above $100/barrel after Russia’s invasion of Ukraine, settled in an $70–90 range through 2024. European natural gas, a huge driver of 2022 inflation, plunged thanks to high storage levels and alternative supplies. These developments align with the WEO’s assumption that energy prices would decline in 2025 (the IMF even revised its oil price outlook lower, factoring in robust supply from OPEC+ and sluggish demand) . Such relief in energy costs has fed through to lower transportation and utility prices for consumers, aiding disinflation. Additionally, global supply chain pressures have largely abated, meaning fewer shortages of cars, chips, and other goods that had driven prices up. Overall, the external drivers of inflation (commodities and supply bottlenecks) have eased as projected.

Global GDP Growth Projections (2023-2026): Graph compares global, advanced economies, and emerging markets’ growth rates. 

At the same time, pockets of inflationary persistence remain, echoing the IMF’s caution about upside risks. Services inflation – linked to wages and stickier costs – is proving more stubborn. In the U.S. and Europe, services prices (from rents to restaurants) are still rising faster than pre-2020 rates . Central bankers note that while goods prices have even seen disinflation or deflation, underlying core inflation is above target, largely due to services. A key reason is labor markets have been exceptionally tight until recently, pushing up wages. Nominal wage growth hit multi-decade highs in 2022–2023 across advanced economies as workers demanded raises to catch up with the cost of living. The IMF update did observe some “moderation” in wage growth and cooling of labor markets”, which is expected to continue easing demand-side pressure . Indeed, by early 2025 unemployment ticked up slightly in the U.S. and Europe (though still historically low), and wage growth showed signs of slowing. This is positive for the inflation outlook – a gradual softening in job markets should help central banks get services inflation down without a severe downturn. Still, any setback on this front (for instance, a re-tightening of labor markets or renewed wage-price spirals) could cause inflation to deviate from the projected path. The IMF warned that if inflation proves “persistent” and remains above target, it could “interrupt the pivot to easing monetary policy”, forcing central banks to keep rates higher for longer . Recent news illustrates this risk: a surprise uptick in inflation in early 2024 prompted the IMF to caution investors against premature rate-cut optimism , underscoring that central banks might need to stay vigilant.

External factors: So far, no new external shock has thrown the inflation trajectory off course – which is good news and in line with forecast assumptions. But geopolitical risks remain a wild card. The ongoing Ukraine war and Middle East tensions (e.g. the late 2024 Israel–Gaza conflict) have potential to disrupt energy markets. An escalation or new conflict could send oil and gas prices soaring again, which would quickly filter into higher inflation globally. In 2024 we saw temporary oil price jumps when conflict fears rose, but these were short-lived. Still, energy markets in 2025 will warrant careful watch, as OPEC+ production decisions or sanctions could tighten supply unexpectedly. Climate-related events are another factor: extreme weather can drive up food prices (for example, heatwaves damaging crops in 2023 contributed to higher rice and grain prices). The IMF’s baseline assumes no major supply shocks, so any such event would be a deviation requiring policy adjustment.

Policy responses: With inflation moving largely in the right direction (downward), central banks have begun adjusting their stance – though cautiously. The U.S. Federal Reserve paused rate hikes in late 2024 after aggressive tightening, and the European Central Bank similarly signaled a hold. Some central banks (especially in emerging markets) have even started cutting rates – e.g. Brazil, Chile, and China eased monetary policy as their inflation fell sharply. This cautiously confirms the IMF’s expectation that 2025 would see a “pivot to easing” monetary policy, at least in countries where inflation is near target . However, the pace of this pivot is uncertain. Officials are explicitly tying decisions to incoming data: if inflation decelerates as projected, 2025 should bring more rate relief; if not, policy could stay tighter. So far, real-world policy moves (or lack thereof) demonstrate central banks hedging against inflation surprises, which aligns with the IMF’s advice. For instance, even as headline inflation drops, many policymakers emphasize the need to “stay the course” until inflation is truly defeated, reflecting the IMF’s point that an “interrupted” disinflation process would be dangerous . The good news is that inflation expectations among consumers and businesses have remained well-anchored through this episode, which the IMF’s chief economist noted as a “great achievement” preventing an even worse spiral . Because of that credibility, the current disinflation trend has been relatively fast compared to 1970s episodes, and most projections (IMF and others) see inflation continuing to ebb into 2025.

In summary, inflation is declining broadly in line with forecasts, restoring a sense of normalcy in many economies. Headline rates are falling as supply shocks fade, just as the WEO Update envisaged . Yet, true to the IMF’s warnings, inflation hasn’t completely vanished as a concern – core price growth is sticky and could take another year or more to get back to target in some countries. This partial alignment means central banks and governments cannot declare victory yet. The IMF’s scenario of inflation returning to ~3–4% globally in 2025 seems plausible given current trends , but getting that last mile down to 2% may prove challenging. External factors like commodity prices and supply chain health will continue to play a role, though right now they are more benign than in 2022. All told, the projections of easing inflation are mostly on track, with the caveat that policymakers must carefully navigate the final leg of the journey to price stability.

Sources: World Economic Outlook Update (IMF, Jan 2025) ; Global Financial Stability Report (IMF, Apr/Oct 2024) ; Fiscal Monitor (IMF, Oct 2024) ; WEF Future of Jobs Report 2025 ; Reuters and news reports for recent economic developments.