IMF Warns of Stagflation

The IMF has challenged the idea that the global economy can quietly absorb the Iran conflict.

What is being framed as a regional war is quickly evolving into a classic supply shock. Energy flows are being disrupted, shipping through the Strait of Hormuz remains uncertain, and oil has moved back above key levels. This feeds directly into inflation at a difficult time, just as markets were beginning to believe the inflation cycle had peaked.

The IMF is now openly warning that if higher energy prices persist, global inflation could rise while growth slows. If oil remains elevated, inflation is likely to increase while output declines. Further rate hikes would weigh on growth, while easing policy would risk fuelling inflation further.

The more pressing issue is duration. The IMF notes that the longer the situation persists, the more severe the economic damage is likely to become. Supply chains are already being affected, investor confidence is weakening, and higher energy costs are flowing through to other sectors. This also highlights how dependent the global economy remains on oil. Shipping, agriculture, manufacturing and energy all rely heavily on it, which is why inflation can spread so broadly. When that core input is constrained, the wider system comes under pressure.

Even prior to this, global growth was slowing. Donald Trump had been pushing for rate cuts, and forecasts are now being revised lower again. The IMF has warned that the damage could “scar” the global economy, even if the conflict eases.

When inflation risks rise as growth weakens, real assets tend to regain focus. Gold does not require ideal conditions, only instability. The recent back-and-forth around ceasefire agreements appears to have stopped weighing on gold for now, with prices holding recent gains. The market may be shifting from concerns around high rates to a stagflationary backdrop, where investors have fewer options and gold becomes more relevant.