IMF warns of drawn-out cost of living pain for Australia as global tariffs weigh on national economy

Australia is forecast to face a prolonged period of above-average inflation and below-trend economic growth, as global tariffs weigh on the national economy.

In its latest economic outlook, the International Monetary Fund (IMF) warns Australia will not be immune to cost of living pain, as US President Donald Trump’s tariff policy flows through.

“With pass-through from higher tariffs gradually materialising, US core inflation is projected to return to the country’s 2 per cent target during 2027,” the IMF report states.

“Australia and Norway are also projected to see some drawn-out persistence in above-target inflation.”

Australia’s headline annual inflation rate dropped to 3.4 per cent from 3.8 per cent for the 12 months until November, according to official figures released in early January.

Meanwhile, the all important trimmed mean inflation rate – which the Reserve Bank uses as it strips out volatile items including fuel – slipped to 3.2 per cent from 3.3 per cent for the year.

And while inflation remains above the Reserve Bank target of 2 to 3 per cent, Australia’s economy will also continue to grow at below trend pace.

According to Australia’s treasury department, inflation will return to the target range next financial year.

Experts are divided about Australia’s current inflation rate and what it could mean for interest rates.

Commonwealth Bank and National Australia Bank are both calling a rate rise after the RBA’s meeting on February 2-3, while Westpac and ANZ forecasts rates will be left on hold.

According to the IMF, global inflation will continue to decline falling from 3.8 per cent in 2026 to 3.4 per cent in 2027.

Treasurer Jim Chalmers said the economic note highlights the current challenges for global economies.

“The global economy is incredibly uncertain with persistently high inflation still a challenge for many countries around the world, and that’s reflected in this report,” he said

“Volatility in the global economy was a key feature of my discussions with international counterparts last week and it will continue to weigh heavily on Australia in the months and years ahead.”

The IMF also maintains its estimates Australia’s economic growth will pick up marginally from 1.9 per cent in 2025, to 2.1 per cent in 2026 and 2.2 per cent in 2027.

Despite the below trend growth, Australia will actually grow faster than the combined advanced economies is projected to be 1.8 per cent in 2026 and 1.7 per cent in 2027.

Advanced economies include the United States, Canada, most of Europe, Japan, Singapore, South Korea, Taiwan, Australia and New Zealand.

The US effective tariff rate underlying the projections is 18.5 per cent, compared with 18.7 per cent in the October forecast.

The corresponding effective tariff rate for the rest of the world is unchanged at 3.5 per cent.