IMF warns prolonged energy price surge could lift inflation

ISTANBUL

The International Monetary Fund (IMF) said Thursday that a sustained rise in energy prices stemming from the war in the Middle East could push global inflation higher and weigh on economic output.

Speaking at a media briefing, IMF spokesperson Julie Kozack said the broader economic fallout would depend largely on how long and how intensely the war continues.

She said the Fund is tracking three main transmission channels: commodity prices, inflation and inflation expectations, and financial conditions.

Kozack noted that major disruptions are already visible. She said the closure of the Strait of Hormuz has cut access to 20% of the global oil supply and seaborne LNG flows, while damage to energy infrastructure in the Gulf and Iran has disrupted oil and gas production.

She said the effect on commodity prices will depend on the duration of the closure and the scale of damage to hydrocarbon production facilities in the region.

According to Kozack, oil and natural gas prices have climbed more than 50% in the past month, and disruptions to fertilizer shipments, alongside broader transport bottlenecks, are also raising the risk of higher food prices.

She said persistently high energy prices would raise headline inflation and could also spill over into broader price pressures through so-called second-round effects, making inflation expectations a key area to monitor.

Kozack said historical patterns suggest that if a 10% increase in oil prices persists through the rest of the year, global headline inflation could rise by about 40 basis points, while global output could decline by between 0.1% and 0.2%.

She also pointed to tightening financial conditions, saying global stock markets have fallen and bond yields have risen across many economies, including the United States, Britain, and Europe. Similar trends are emerging in developing economies, where volatility has increased, the US dollar has strengthened, and several currencies have weakened.

Kozack said the IMF will provide a broader update on the global, regional, and country-level outlooks in its World Economic Outlook report due in April.

On the regional effect, she said initial IMF assessments point to weaker growth in Gulf economies. While higher energy prices could partly or fully offset lower output in some countries, depending on how quickly exports resume, she said, regional fiscal and external balances are likely to come under pressure.

She added that most Gulf Cooperation Council countries still have substantial policy buffers and have strengthened their resilience in recent years through reforms, economic diversification efforts, and logistics upgrades.

Kozack said the main transmission channel for European energy, given the region’s dependence on imports, while tighter financial conditions are also expected to weigh on the outlook.

She added that IMF staff have updated their assessment of how the conflict and higher oil prices could affect the US economy for the country’s Article IV consultation report.

Asked about US public debt reaching $39 trillion, Kozack reiterated the IMF’s urging Washington to reduce its fiscal deficit and place public debt on a firm downward path.

On monetary policy, she said central banks should remain alert to the inflationary implications of higher energy prices, especially any effect on inflation expectations.

Kozack also said the IMF remains in close contact with member countries. So far, she said, no formal requests for emergency financing have been received, but the Fund stands ready to use its available tools to support members as conditions evolve.