- The IMF sees global inflation rising to 4.7% in 2026, up from 4.1%.
- War, tariffs, AI demand, and resilient consumption are key inflation drivers.
- The inflation shock appears milder than the 2022/23 surge.
- Korea and Taiwan risk overheating and may need tighter policy.
- India has room to pause, while Indonesia may need modest further tightening.
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Conflict in the Middle East and the AI cycle have driven up prices this year. In its July update, the IMF projects that global inflation will rise from 4.1% to 4.7% in 2026.
These projections are less dire than initially feared when the Iran war broke out. This was going to be a year of higher inflation in any case; the IMF, back in October of last year had projected global inflation to rise by 30bps in 2026. Pass-through from tariffs, rising price of electronics on the back of the AI cycle, and resilient demand were expected to be key contributors to the modest increase in inflation around the world. Adding war-related considerations on top of those factors, a further 30bps increase in global inflation projection (to 4.7%) is not extreme by any means, in our view.
Granted, there will be consequences for those economies and individuals at the lower end of the income spectrum, monetary policy is already being recalibrated, exchange rates have been adjusting, but overall, compared to the inflation shock of 2022/23, this episode comes across to us as manageable.
The world is bifurcated between those with heavy energy dependence and those fortunate enough to have domestic endowments of energy; also, a line can be drawn between those benefitting from the AI cycle’s demand surge for hardware and those not in that manufacturing ecosystem. As we consider market and policy outlook for the rest of the year, these issues come to the fore.
Take South Korea and Taiwan, both undergoing historic surges in export demand (rising presently at respective yoy rates of 70%+ and 40%+) and asset price boom. The fact that their inflation forecasts for 2026 are up only modestly should not hold back the monetary authorities from tightening policy. Indeed, time to get in the way of overheating is right now.
On the other end of the spectrum is India, with considerable exposure to the commodity price surge but still characterised by within-target inflation, firmly positive real interest rates, and measures being taken to mobilise capital flows. We think this gives the RBI plenty of space to maintain policy pause.
Indonesia has faced capital flow and exchange rate volatility this year, compelling Bank Indonesia to hike rates. Short term policy rates are heading in the right direction there, in our view; a little more work from BI should do it.
These cases point out the spectrum of monetary policy compulsions out there. Central banking is not one-size-fits all.
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