IMF flags oil threat to US prices

Rising global energy prices are adding a fresh inflation risk to the United States even as the International Monetary Fund said the world’s largest economy remains on a solid growth path, with trade and fiscal changes expected to narrow the current-account deficit only modestly over the medium term.

The IMF’s latest assessment said growth in the US is projected to reach 2.4 per cent in 2026, while employment growth is slowing and unemployment is expected to stay near 4 per cent. It said fading tariff effects and lower oil prices should help core PCE inflation return to 2 per cent during the first half of 2027, but warned that rising energy prices now pose upside inflation risks.

That warning lands at a delicate moment for policymakers. Oil markets have been unsettled by conflict-linked supply fears, and Reuters has reported that the IMF sees a prolonged rise in energy prices as capable of lifting inflation and weakening growth, with every sustained 10 per cent increase in oil prices adding about 40 basis points to inflation while trimming output. Federal Reserve officials have also been cautioning that higher energy costs could complicate the path back to price stability.

For Washington, the issue is not only consumer prices but also the external balance. The fund said the combined effect of higher tariffs and fiscal policy changes would produce only a modest decline in the US current-account deficit over the medium term, to around 3.5 per cent of gross domestic product. That suggests that even with policy shifts aimed at reshaping trade flows and domestic demand, the structural forces driving the US external gap remain firmly in place.

Energy shock clouds inflation path

The IMF’s position reflects a broader concern taking hold across markets: energy can still disrupt the disinflation story even after central banks have spent years tightening policy to restore price stability. Fed Vice Chair Philip Jefferson said last week that sustained increases in energy prices could worsen inflation and weaken spending by households and businesses. New York Fed President John Williams has also said monetary policy is well placed for unusual circumstances, but acknowledged that war-driven disruptions to oil supply chains could push inflation higher in the near term.

Those concerns have sharpened as crude prices have climbed on fears that the Middle East conflict could lead to a more durable supply shock. Reuters reported on 2 April that Brent and US crude had risen sharply over the past month, raising questions over whether the global economy’s resilience can hold if the energy shock drags on. The IMF, in separate comments on 30 March, warned that the conflict was dimming the outlook for many economies and could bring slower growth and higher prices far beyond the region.

Even so, the IMF’s central US case is not one of imminent deterioration. Its Article IV review pointed to balanced near-term risks for growth and unemployment, a sign that the fund still sees the economy as capable of absorbing some external pressure. That view rests partly on expectations that earlier tariff effects will fade and that lower oil prices, rather than a prolonged surge, will eventually reassert themselves.

The uncertainty lies in how long energy markets remain under strain. If oil prices stay elevated, the Fed may find it harder to justify policy easing, especially if households begin to expect faster price rises. Reuters reported that Fed Governor Michael Barr has already warned against any rise in longer-term inflation expectations, arguing that renewed price shocks could become embedded in wage and pricing behaviour.

For the White House and Treasury, the IMF’s external-sector view is a reminder that tariff moves alone are unlikely to transform the US balance with the rest of the world. A current-account deficit of around 3.5 per cent of GDP would still leave the country reliant on foreign capital and exposed to shifts in investor sentiment, even if the gap narrows from current levels. That matters because higher energy import costs can worsen trade balances and feed into broader inflation at the same time.