The Global Fight Against Inflation Is Almost Won — but the Hardest Part Is Still Ahead

Two years after inflation surged to levels not seen in decades, the world economy has reached a milestone that few forecasters dared to promise: the global fight against rising prices is, in the words of the International Monetary Fund, 'almost won'. The Washington-based lender, which counts 190 member countries, delivered that verdict in its World Economic Outlook published on 22 October 2024, projecting that global headline inflation will fall from an average of 5.8% in 2024 to 3.5% by the end of 2025 — a level slightly below the average annual rise in prices recorded over the two decades before the pandemic.

The achievement is real and it is broad. Much of the world has managed to lower inflation while avoiding a recession, a combination once dismissed as nearly impossible. Yet the same report that celebrates the victory spends most of its pages cataloguing what could still go wrong. 'Despite the good news on inflation, downside risks are increasing and now dominate the outlook,' said Pierre-Olivier Gourinchas, the IMF's chief economist. Growth is held at 3.2% for both 2024 and 2025 — a rate the fund itself calls 'stable yet underwhelming'. The disinflation story, in other words, is entering its most delicate chapter: the part where the easy progress is behind us, the last percentage points are the hardest to squeeze out, and every policy decision carries new risks.

How far inflation has fallen — and how far it still has to go

To appreciate where the global economy stands, it helps to remember how bad things got. Inflation peaked at a year-over-year rate of 9.4% in the third quarter of 2022, as pandemic-era supply disruptions, soaring energy and food prices, and a flood of stimulus collided with a demand boom that central banks had not anticipated. From that peak, the descent has been steep: 5.8% on average in 2024, and a projected 3.5% by the end of 2025. The projected end-2025 rate sits slightly below the average annual price increase of the two decades before the pandemic — meaning that, on paper, the world is on the verge of returning to the kind of price stability that once felt routine.

The IMF credits this outcome to three forces working together. First, responsive monetary policy: central banks raised interest rates aggressively and, crucially, held them high for long enough to cool demand without breaking the economy. Second, labour market conditions normalised after the pandemic-era chaos of hiring freezes, mass layoffs and then frantic rehiring. Third, the supply shocks that had pushed up the prices of energy, food and goods gradually unwound. Together these forces allowed the world to engineer what economists call a soft landing — taming inflation without triggering a global recession, an outcome that in past episodes has been the exception rather than the rule.

But 'almost won' is not 'won'. The fund is careful to distinguish headline inflation, which is falling convincingly, from the underlying pressures that still simmer beneath the surface. Services inflation — the prices of things like housing, transport, insurance and restaurant meals — remains nearly double its pre-pandemic level. Wages in certain countries are still catching up to the higher cost of living, and that catch-up process feeds directly into service prices. The result is that several emerging market economies, including Brazil and Mexico, have seen an uptick in inflationary pressures even as the global average keeps falling. The last mile of disinflation, as always, is proving the hardest.

Why the last mile of disinflation is the hardest

Central banks fight inflation primarily through one instrument: the policy interest rate. When a central bank raises its rate, borrowing becomes more expensive for households and businesses. Mortgages, car loans and corporate credit all reprice upward; spending on homes, cars and factory expansion cools; hiring slows and wage growth moderates. As demand softens, sellers lose pricing power and the rate of price increases falls. The mechanism is blunt but powerful, and it is the reason the 2022–2023 tightening cycle worked as well as it did.

The problem is that the final stretch of disinflation depends on factors that interest rates influence only slowly and imperfectly. Goods prices — televisions, furniture, clothing — respond quickly because they are traded in competitive global markets and their supply can expand. Services are different. A haircut, a hotel night, a doctor's appointment or a monthly rent payment cannot be imported from abroad, and their costs are dominated by wages. When workers demand higher pay to keep up with the cost of living they have just endured, businesses pass those higher labour costs on to customers, and the cycle can persist long after goods prices have stabilised. This is precisely the pattern the IMF now flags: services inflation nearly double pre-pandemic levels, wage catch-up in certain countries, and renewed pressure in parts of the emerging world.

There is a second, more subtle difficulty: expectations. Inflation is partly a self-fulfilling prophecy. If workers and firms believe prices will rise by 5% next year, workers demand 5% raises and firms raise prices by 5% in anticipation. The IMF notes that inflation expectations have remained well anchored this time around — a hard-won achievement that reflects the credibility central banks rebuilt over decades. But the fund also issues a warning that should unsettle policymakers: 'it may be harder next time, as workers and firms will be more vigilant in protecting their standards of living and profits going forward.' A generation of workers and managers who lived through the 2022 price shock will be quicker to build inflation into wage demands and price lists. The memory of high inflation, once acquired, is expensive to erase.

This is why the IMF insists that central banks remain vigilant even as the victory approaches. Cutting rates too early, before underlying services inflation has genuinely converged to target, risks reigniting the very pressures that took two years of tight policy to suppress. Cutting too late, on the other hand, risks choking off growth and tipping fragile economies into recession. The timing of the pivot from tightening to easing is one of the hardest judgements in macroeconomic policy, and it is the judgement every major central bank is now making in real time.

The 'policy triple pivot': rates, spending and reform

The IMF's answer to this delicate moment is what it calls 'a policy triple pivot'. The first pivot concerns interest rates: monetary policy must continue to be guided by data, easing only as confidence grows that inflation is durably on its way back to target. The second pivot concerns government spending: after years of pandemic support and energy subsidies, fiscal policy needs to rebuild buffers, because high public debt limits the room governments have to respond to the next shock. The third pivot is the most ambitious and the most neglected: reforms and investment to boost productivity. If the structural capacity of economies to produce goods and services grows faster, price pressures ease naturally and living standards rise without inflation.

The triple pivot matters because monetary policy alone cannot finish the job. Interest rates can cool demand, but they cannot fix the structural problems that the IMF says will dominate the decade ahead: low productivity growth and aging populations. If economies cannot produce more with the same inputs, then every wage increase becomes an inflationary event rather than a gain in living standards. Reform is the unglamorous half of the disinflation story — the part that determines whether the victory over inflation translates into durable prosperity or merely into a decade of stagnation at low prices.

Stable yet underwhelming: the growth problem hiding behind the inflation victory

The IMF kept its global growth estimate at 3.2% for both 2024 and 2025. On the surface that is reassuring: no recession, no collapse, a world economy that keeps expanding. The fund's own adjective tells the real story — 'stable yet underwhelming'. A 3.2% global growth rate is not enough to lift living standards meaningfully across the developing world, and it is well below the pace that prevailed before the financial crisis of 2008.

The distribution of growth is also uneven, and the pattern reveals much about the post-pandemic economy. The United States is forecast to see faster growth, powered by a resilient labour market and consumer spending that has repeatedly defied predictions of a slowdown. Emerging Asian economies are expected to expand strongly as well, helped by robust investment linked to artificial intelligence — data centres, chips and the infrastructure of the new digital economy are channelling capital into the region. But the IMF lowered its outlook for other advanced economies, notably the largest European nations, and for several emerging markets. The reasons are familiar: intensifying global conflicts and the risk they pose to commodity prices, weak industrial demand, and economies still digesting the energy shock of the past two years.

This divergence creates a puzzle for global policymakers. Where growth is strong, the temptation is to keep policy tight for longer to make sure inflation does not reaccelerate. Where growth is weak, the pressure is to ease quickly to avoid a slump. A world in which the two largest economic blocs are pulling in opposite directions makes the job of every central bank harder, because capital flows, exchange rates and import prices transmit conditions from one economy to another. The IMF's warning that downside risks 'now dominate the outlook' is, at its core, a warning that the benign combination of falling inflation and steady growth could break in either direction.

The risks that could derail the soft landing

The fund's list of downside risks reads like a tour of the world's open wounds. The IMF highlights several threats in particular:

• Financial market volatility: sudden sell-offs, such as the sharp slump in early August 2024, can tighten financial conditions overnight and force central banks to react to markets rather than to inflation.
• Geopolitical conflict, notably in the Middle East, with the potential to disrupt energy supplies and push commodity prices sharply higher.
• Spikes in commodity prices, which hit lower-income nations hardest because food and energy account for a greater share of household spending.
• A potentially deeper contraction in the property market of China, with knock-on effects for global demand and commodity prices.
• Interest rates remaining too high for too long, squeezing borrowers and tipping vulnerable economies into recession.
• Rising protectionism in global trade, which fragments supply chains and raises costs for everyone.

The August episode deserves attention as a case study in how quickly calm can turn to turbulence. Markets steadied after the brief slump, which was fuelled by an unwinding of the yen carry trade — a strategy in which investors borrow cheaply in yen to buy higher-yielding assets elsewhere — and by weaker-than-expected labour market data from the United States. But the IMF argues the episode left a scar: 'The return of financial market volatility over the summer has stirred old fears about hidden vulnerabilities. This has heightened anxiety over the appropriate monetary policy stance.' When investors suddenly question whether central banks are moving too fast or too slow, asset prices can swing violently even if the underlying economy has not changed.

The deeper concern is contagion. Market turbulence is a key risk if underlying inflation remains stubborn, because a world of sticky prices and volatile markets is the worst of both worlds: central banks cannot ease to support growth, and investors cannot rely on stability to price risk. The IMF singles out low-income countries as the most exposed, already under stress from high sovereign debt and currency market volatility. For these economies, a sudden spike in global interest rates or a plunge in their currencies can turn a manageable debt burden into a crisis within months.

The unequal burden: why low-income countries face the steepest climb

The disinflation victory is global in the aggregate but deeply unequal in its distribution. Lower-income countries face a double vulnerability. First, their households spend a greater share of income on food and energy, so any spike in commodity prices translates almost immediately into higher inflation and harder living conditions. Second, these countries are already under greater stress from sovereign debt repayments, which limits the funding available for public programs precisely when social needs are greatest.

The mechanics are unforgiving. When global interest rates stay high, debt service on dollar-denominated borrowing consumes a rising share of government budgets in poorer nations. When their currencies weaken — often because capital flows back to the United States or other safe havens — the local-currency cost of servicing that debt rises further. The result is a squeeze on spending for health, education and infrastructure, the very investments that would raise productivity and ease inflation over the long run. The IMF's warning that commodity price spikes would especially hurt lower-income nations is therefore not merely a statement about price indices; it is a statement about development trajectories being derailed by forces those countries cannot control.

This is also where the geopolitical risk and the inflation risk intersect. A conflict-driven surge in oil or food prices would force central banks in low-income countries to tighten policy to defend their currencies and contain imported inflation — tightening that would land on economies already struggling with debt and weak growth. The soft landing that the advanced world is engineering could, in this scenario, become a hard landing for the poorest.

The decade ahead: growth stuck in low gear

Perhaps the most sobering part of the IMF's outlook concerns not the next two years but the next ten. The fund forecasts global growth of 3.1% annually at the end of the 2020s — the lowest level in decades. China's weaker outlook weighs on the medium-term projections, as does a deteriorating outlook in Latin America and Europe. Behind these regional stories sit structural headwinds that no interest rate decision can fix: low productivity growth and aging populations.

The arithmetic of aging is simple and brutal. As populations age, the share of workers shrinks relative to retirees, labour supply growth slows, and governments must spend more on pensions and health care even as tax revenues grow more slowly. Low productivity compounds the problem: if each worker produces no more than before, then an aging economy simply produces less growth. The IMF is blunt about the consequences: 'Projected slowdowns in the largest emerging market and developing economies imply a longer path to close the income gaps between poor and rich countries. Having growth stuck in low gear could also further exacerbate income inequality within economies.'

This long-term framing changes how the inflation victory should be read. Bringing prices back under control was a necessary condition for prosperity, but it was never a sufficient one. The world that emerges from the disinflation cycle will still face the same structural questions it faced before: how to raise productivity, how to integrate aging workforces, how to finance the transition to cleaner energy, and how to keep trade open enough that specialization continues to raise living standards. The IMF's 'policy triple pivot' is, in effect, a recognition that the tools that won the battle against inflation are not the tools that will win the peace.

What to watch next

For readers trying to gauge whether the 'almost won' verdict will hold, a handful of indicators deserve attention over the coming quarters:

1. Services inflation in major economies — the true test of whether the last mile of disinflation is being covered.
2. Wage growth relative to productivity — persistent wage growth above productivity is the classic signature of inflationary pressure returning.
3. Central bank communication and the pace of rate cuts — too fast a pivot risks reigniting inflation; too slow a pivot risks recession.
4. Commodity prices, especially oil and food — the transmission channel through which geopolitics becomes inflation.
5. Financial market stability — whether episodes like the August sell-off remain isolated or become a pattern of recurring volatility.
6. Debt stress in low-income countries — the canary in the coal mine for the global financial system.

None of these indicators, taken alone, will tell the whole story. Together they describe the narrow corridor the world economy must now thread: inflation low enough to be forgotten, growth high enough to be felt, and financial conditions stable enough that neither policymakers nor households are forced into panic decisions. The IMF's message is that the corridor exists — but that staying inside it will require discipline, luck and, above all, the structural reforms that the triple pivot demands.

A victory that must be earned twice

The phrase 'almost won' captures the global economy's moment with unusual precision. The battle against the inflation surge of 2022 has been fought to a near-victory: prices are falling, recession was avoided, and the projected 3.5% inflation rate for the end of 2025 would mark a return to something like the stability of the pre-pandemic decades. But the IMF's own report makes clear that the victory is provisional. Downside risks dominate the outlook, services inflation remains stubborn, growth is stable yet underwhelming, and the structural headwinds of the coming decade — low productivity and aging populations — threaten to trap the world in low gear.

History offers a caution. Inflation victories have been lost before, when policymakers declared success too early and eased policy while underlying pressures still simmered. The memory of the 1970s, when premature easing produced a second, worse inflation wave, is the reason central banks today insist on 'last mile' vigilance. The IMF's warning that expectations may be harder to anchor next time adds a new twist: the very experience of defeating inflation may make workers and firms more alert to protecting their incomes, and therefore quicker to reignite price pressures if policy slips.

The global fight against inflation, then, is almost won — but it must be won twice: once against the price surge itself, and once against the complacency that victory invites. The tools for the second victory are not interest rates but reforms, investment and fiscal discipline. Whether the world summons the political will to use them is the question that will define the rest of the decade.