IMF Warns Inflation Battle Is Not Over as Services Prices Stay Sticky

Why Services Inflation Is Harder to Tame

Goods inflation was largely driven by supply chain disruptions and commodity price shocks following the pandemic and the Russia-Ukraine conflict. Once supply chains normalised and commodity prices stabilised, goods disinflation proved relatively swift. Services inflation, however, is more sensitive to domestic demand conditions and wage dynamics — which change more slowly.

The IMF's analysis shows that in the United States, eurozone, and United Kingdom, services inflation in categories such as restaurants, healthcare, and personal care has been running at 4–5% annually — well above what is consistent with 2% headline targets. This persistence is partly driven by the fact that workers in service industries secured significant wage increases over 2022–2024, and firms have been able to pass these costs on to consumers.

Central Bank Policy Implications

The note explicitly warns against premature easing, citing historical episodes where central banks cut rates before inflation was durably at target, resulting in a second inflation wave. It models scenarios in which a 50 bps premature cut in 2026 could require 100 bps of additional tightening in 2027 to restore price stability — a costly stop-and-go cycle that damages growth and central bank credibility.

The IMF recommends a data-dependent, meeting-by-meeting approach, with central banks communicating clearly that their decisions are guided by core inflation dynamics and inflation expectations — not by financial market pricing or political pressures. It also calls for strengthening fiscal frameworks to reduce the burden on monetary policy, since loose fiscal policy complicates the inflation task.