The International Monetary Fund (IMF) has warned that Australia is on track to record one of the highest inflation rates among developed economies.
In its latest World Economic Outlook, the global lender said economies worldwide face repercussions from higher commodity prices, second-round effects on inflation expectations—particularly sensitive to energy and food—and amplification through financial market sentiment.
While the global economy has so far withstood a series of shocks, the IMF cautioned that a further disruption—namely the ongoing conflict in the Middle East since late February—is testing that resilience.
The Fund forecasts that Australia’s GDP growth will remain flat this year at around 2.0 per cent, before easing to 1.7 per cent in 2027.
These figures are lower than previous projections of 2.1 per cent this year and 2.2 per cent next year.
While growth remains a concern ahead of Treasurer Jim Chalmers’ next budget, due on 12 May, inflation presents a more pressing risk.
The IMF expects Australia’s consumer price index to reach 4.0 per cent this year and remain elevated at 3.2 per cent in 2027.
These figures exceed those forecast for most advanced economies, including the United States, the United Kingdom, Germany, New Zealand and Japan.
Unemployment is also expected to remain persistent, at around 4.2 to 4.3 per cent.
IMF calls for less state intervention
Prior to the escalation of conflict in the Middle East, the IMF had planned to revise growth forecasts upwards. However, disruptions linked to instability in the Strait of Hormuz and attacks on energy infrastructure have reversed that momentum.
Under a severe scenario, in which conflict causes sustained damage to energy supply, global growth could fall to 2 per cent in 2026—bringing the world close to recession.
IMF chief economist Pierre-Olivier Gourinchas warned against heavy-handed policy responses.
“Price caps, subsidies and similar interventions are popular, but they distort markets,” he said. “They are often poorly designed, difficult to unwind, and extremely costly.”
He added that most countries no longer have the fiscal space for such measures and should instead focus on targeted, temporary support for vulnerable households.
Experts warn stimulus could worsen inflation
Two economists told The Epoch Times they were not surprised by the IMF’s outlook.
Professor John Quiggin of the University of Queensland said the federal government’s fuel excise cut risks sending the wrong signals, despite its temporary nature.
Graham Young, Executive Director of the Australian Institute for Progress, warned that government policy risks repeating the inflationary cycles of the 1970s and 1980s.
“On its own, rising oil prices would shift spending away from non-essential goods,” he said. “But if governments attempt to cushion the impact without offsetting savings, inflation will increase.”
He also cautioned that proposed wage rises without corresponding productivity gains would add further pressure.
“Wage increases without productivity growth are typically inflationary at first, and then contractionary, as they reduce business viability, increase unemployment and slow economic activity,” Young said.
He pointed to historical precedent, noting that interest rates were insufficiently restrictive in the mid-1970s, before rising sharply through the late 1980s.
“Current settings are stronger than in the 1970s, but not by a wide margin,” he added.
RBA monitors inflation expectations
“Our estimate is that Australia’s productive capacity is currently growing at around 2 per cent,” he told an audience at New York University.
“Inflation began to rise in the latter part of last year and is now around 3.5 per cent on a core basis, and closer to 4 per cent headline—which is too high.”
He added that monetary policy can do little to address short-term price shocks, but must ensure they do not become embedded in long-term expectations.
“The key question is how this will affect economic activity,” Hauser said.
“This is a dangerous moment for the global economy,” Chalmers said. “We are factoring in this uncertainty as we prepare a budget focused on resilience and reform.”
