Summary
Highlights
For years, the narrative was that inflation peaked and was on a smooth path back to 2%, leading to rate cuts and a 'soft landing'—disinflation without a recession or job losses. This scenario, dubbed 'immaculate disinflation,' was widely expected by markets.
On July 8th, the IMF's World Economic Outlook update revealed that the disinflation trend, in place since early 2024, has stalled. The IMF revised global headline inflation up to 4.7% for 2026, from 4.1% in 2025, and cut global growth to 3% for 2026. This combination of higher inflation and slower growth is not a soft landing.
The IMF report also highlighted a critical split in the global economy. One part consists of countries plugged into the AI hardware value chain, experiencing significant growth (e.g., South Korea with a 7.5% annual growth pace). The other part comprises energy importers and consumer-driven nations without a chip industry, experiencing slower growth or contraction (e.g., the Euro area at 0.9% growth).
This 'K-shaped' recovery traps central bankers. If they cut rates to support the struggling consumer and energy importers, they fuel inflation and overheat the AI sector. If they hike or hold rates to combat inflation, they crush the already weak consumer. There's no single interest rate policy that can address both halves of the economy simultaneously.
The death of the soft landing means 'higher for longer' interest rates are now the base case, and global inflation will likely remain elevated around 4.7%, meaning prices won't return to previous levels. The decoupling of economies and the dilemma for central banks will be crucial to watch, as they eventually must choose which half of the economy to prioritize.