IMF Inflation Forecast: What Inflation Means for Stock Market Investors

For over a year, sky-high inflation has forced households to stretch their dollars to make ends meet. While you may know how inflation impacts your personal budget, it’s more challenging for experts to determine how a sustained period of high inflation will impact the stock market. 

One metric to consider is the International Monetary Fund’s inflation forecast. With inflation numbers starting to cool off in 2023, the IMF’s latest forecast suggests a recovery is coming, though how soon (and how smoothly) it will happen, we can’t say. This report has important implications for investors, so keep reading to learn what it could mean for you. 

Key Takeaways

• High inflation can have negative impacts on households, businesses, and investors. 
• Typically, high inflation leads to more volatility in the stock market. 
• The latest IMF inflation forecast paints a mixed picture of economic recovery across the next several years. 

What is the IMF Inflation Forecast?

Formed in 1944, the International Monetary Fund (IMF) is a global organization with the goal of building a framework for international economic cooperation. According to the organization’s website, the IMF works to achieve sustainable growth and prosperity by “supporting economic policies that promote financial stability and monetary cooperation.” 

One of the organization’s many contributions toward this goal is the quarterly World Economic Outlook report. Many investors carefully consider the forecasts and other information included in this report because it can potentially illuminate economic dangers ahead. 

Current IMF Inflation Forecast

The most recent installment, titled A Rocky Recovery, was published in April 2023. Within the report, the IMF included its global inflation predictions for the next couple of years. Here’s a closer look at the forecast:

• 2022: The global inflation forecast showed inflation hitting 8.7% in 2022, up from 4.7% in 2021. 

• 2023: Global inflation is forecast to decline to 7.0% in 2023. 

• 2024: Global inflation is forecast to decline to 4.9% in 2024. 

The IMF predicts global inflation will not return to its target rate until 2025. Even with lower commodity prices, core inflation is taking longer to decline. 

In addition to these inflation predictions, the report included global growth predictions. Here’s the breakdown of those growth predictions:

• 2023: The global growth forecast expects growth to bottom out at 2.8% in 2023, down from 3.4% in 2022. 

• 2024: The global growth forecast expects growth to split the difference in 2024, settling at 3.0%. 

In their October report from last year, the IMF noted that its growth predictions were the weakest they’d shared since 2001, ignoring the global financial crisis and the beginning phase of the COVID-19 pandemic. With that in mind, the language of the latest World Economic Outlook report is more encouraging. 

The report says, “On the surface, the global economy appears poised for a gradual recovery from the powerful blows of the pandemic and of Russia’s unprovoked war on Ukraine. China is rebounding strongly following the reopening of its economy. Supply-chain disruptions are unwinding, while the dislocations to energy and food markets caused by the war are receding.”

Other Insights from the Report 

The IMF wrote extensively in their latest report about recent troubles in the financial sector. There was an extended period of low interest rates before last year’s sudden tightening of monetary policy. The IMF warned repeatedly that such a rapid increase in rates would have serious repercussions for economies worldwide. 

The report says, “The financial instability last fall in the gilt market in the United Kingdom and the recent banking turbulence in the United States with the collapse of a few regional banks illustrate that significant vulnerabilities exist both among banks and nonbank financial institutions.” 

Interestingly, the report suggests the slowdown in growth is mostly concentrated in advanced economies. The IMF provided two different growth rate predictions – one global prediction and one for advanced economies. Whereas the baseline prediction suggested growth would slow from 3.4% in 2022 to 2.8% in 2023, advanced economies are predicted to see growth slow from 2.7% in 2022 to 1.3% in 2023. 

The report explains, “At this point in the tightening cycle, we would expect to see stronger signs of output and employment softening. Instead, both output and inflation estimates have been revised upward for the past two quarters, suggesting stronger-than-expected demand, which may require monetary policy to tighten further or to stay tighter for longer.” 

Considering the strain we’ve recently seen in the financial sector, the IMF says we’re entering a “perilous” era in which growth is slowing but inflation has yet to turn a corner and drop decisively. The IMF suggests policymakers must be…