The conflict in the Middle East is reviving the specter of inflation and hobbling the global economy just as it was showing signs of strengthening at the start of the year, the Organization for Economic Cooperation and Development said.
In its updated outlook Thursday, the Paris-based organization sharply increased its inflation forecasts for major economies and now sees the average rate for the Group of 20 this year jumping to 4% — with an even higher pace in the U.S. — rather than the 2.8% it predicted in December.
Downward adjustments to growth were less dramatic in the short term, but largely because the drag from the Iran war was offset by better-than-expected momentum at the start of the year.
The OECD is the first of the major international economic institutions to formally update forecasts. Other indicators, such as business surveys, have already begun to point to a synchronized global shock of weaker activity and rising prices.
The organization also warned that there is a “significant downside risk†to its projections from further disturbance of exports from the Middle East that would fuel inflation, reduce growth and potentially trigger repricing on financial markets.
“The breadth and duration of the conflict are very uncertain, but a prolonged period of higher energy prices will add markedly to business costs and raise consumer price inflation, with adverse consequences for growth,†the OECD said.
Disruption from the Iran war arrived just as the global economy was picking up tailwinds from investment in artificial intelligence, an easing of U.S. tariff rates and supportive monetary and fiscal policies.
Without the conflict, the OECD said it could have revised up its global growth forecast by 0.3 of a percentage point for 2026. Instead, it left that prediction unchanged at 2.9% and trimmed its figure for 2027 by 0.1 point to 3%.
The sudden change of the economic backdrop is also forcing policymakers to change tack. Last week, the Federal Reserve signaled that any cuts in U.S. borrowing costs remain a long way off. European Central Bank officials are considering a possible hike as soon as April, while Norwegian officials Thursday revealed that they had even discussed a move as soon as this week.
For the U.S., the OECD expects inflation to jump to 4.2% this year, from 2.6% in 2025. Its price outlook for this year is 1.2 percentage points higher than in December, also because the labor market remains tight with slowing net migration and tariffs are adding upward pressure.
“We do think there is a combination of factors that are likely to have a bearing on the inflation outlook in the U.S.,†OECD Secretary-General Mathias Cormann said in an interview with Bloomberg Television.
The organization now expects policy rates to remain unchanged throughout 2026 in both the U.S. and the UK, while it foresees that the ECB will hike once in the second quarter to ensure inflation expectations remain under control.
“Our current expectation is energy price effect will be temporary, and as such central banks would be able to take that into account,†Cormann said. “But in the end, what we are saying to central banks is that they need to continue to focus very closely on the data as it evolves and be very prudent to ensure that inflation expectations are well anchored.â€
The 38-member organization also urged governments still carrying large debts racked up through spending during previous crises to refrain from broad-based subsidies and transfers.
“Measures to cushion the impact of higher energy prices should be timely, well-targeted on households most in need and viable firms, preserve incentives to lower energy use and have clear expiry mechanisms,†the OECD said.
Horobin writes for Bloomberg.
