US inflation will surge to 4.2% on energy shock, warns OECD

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The Middle East crisis will fuel a surge in US inflation to 4.2 per cent this year, the highest in the G7, according to an OECD forecast that highlights the cost of the US-Israeli war with Iran.

The Paris-based organisation predicted that energy price rises would sharply increase inflation around the world, with “significant downside risks” to growth if disruptions to energy exports worsened.

While the OECD expects US inflation to jump from 2.6 per cent in 2025, countries including China, South Korea and India also face a sharp increase in price growth because of the energy shock.

“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 organisation predicted in its interim economic outlook.

Rising pressure on consumers would hurt US economic growth, which is expected to slow to 2 per cent this year and 1.7 per cent in 2027, the OECD said. Global growth is forecast to slow from 3.3 per cent last year to 2.9 per cent in 2026, before picking up to 3 per cent next year.

Prior to the Iran war, global growth was proving resilient, driven in part by a jump in capital spending on AI as well as surging stock markets.

But the prognosis has changed radically since the US and Israel launched attacks on Iran at the end of February, pushing up oil and natural gas prices and sending ripple effects through other commodities including metals and fertiliser.

Investment plans for big publicly listed US and Chinese technology companies had been increasing earlier this year as wider business sentiment improved. However, “the resilience of the global economy is now being tested”, said the OECD, noting exports through the Strait of Hormuz represented a quarter of global seaborne oil trade and a fifth of global liquefied natural gas trade.

It added that fertilisers were a particular risk, with Gulf states accounting for 34 per cent of global urea exports and half of all sulphur exports. The Middle East also produces more than a third of the world’s helium supply and two-thirds of its bromine, which are important in industrial supply chains, including for semiconductors.

“A prolonged period of disruption could also result in the emergence of significant energy shortages that would lower growth further,” the OECD found.

Early this year, indicators pointed to a 0.3 percentage point upgrade in global GDP projections, but the Middle East conflict had entirely erased that boost, the organisation said.

Headline inflation in the G20 has been revised up by 1.2 percentage points in 2026 to 4 per cent, and by 0.2 of a point next year to 2.7 per cent, compared with the OECD’s December outlook.

Eurozone growth is forecast to be markedly weaker at 0.8 per cent this year, before picking up to 1.2 per cent next year.

In the US a slowdown in household spending would sap momentum heading further into 2026, the OECD predicted. Nevertheless, the Federal Reserve is predicted to keep interest rates on hold, while the European Central Bank is likely to push through a single increase.

Most members of the rate-setting US Federal Open Market Committee last week said they still expected to cut rates this year — though Fed chair Jay Powell cautioned that their forecasts were far more uncertain than usual because of the Iran war.

The FOMC raised its projections only slightly, saying it now expected headline and core personal consumption expenditures inflation to end the year at 2.7 per cent, compared with previous estimates of 2.4 per cent and 2.5 per cent respectively.

US officials also notched up US growth estimates for this year from 2.3 per cent to 2.4 per cent, amid signs of strong US productivity gains.

The OECD’s outlook for US inflation is markedly above that of the Fed and many private sector forecasters, partly because it is expecting a more persistent energy price shock and has forecast an ongoing impact from last year’s US tariff increases.

It also judges the US economy to already be tight because of lower immigration. The OECD reports an annual average for inflation, rather than focusing on the fourth quarter, as some other economists do.

The OECD said that in a “downside scenario”, with oil prices hovering at $135 a barrel in the second quarter, global output could be 0.5 per cent weaker than the organisation’s baseline prediction, while consumer prices would be nearly 1 per cent higher.

While some countries have been considering emergency support measures for households facing higher energy bills, the OECD said these need to be “well-targeted” on households most in need and “viable firms”.