The OECD projects rising energy prices due to the potential Iran war, but anticipates minimal impact on underlying US inflation. The organization revised upward the US economic growth forecast, while lowering forecasts for several other major economies, including the Eurozone and the UK.
The Iran war will send energy prices surging but leave underlying U.S. inflation virtually unchanged, the Organization for Economic Co-Operation and Development projected Wednesday, revising American economic growth upward even as it cut forecasts for several other major economies.
The Paris-based OECD expects U.S. headline inflation to jump to 4.2 percent this year from 2.6 percent in 2025, driven almost entirely by the energy shock from the near-closure of the Strait of Hormuz. But core inflation — which strips out food and energy — is projected at 3.0 percent in 2026, unchanged from the December forecast, and 2.4 percent in 2027, just a tenth of a point higher. The OECD is effectively betting that the largest energy supply disruption since the 1970s will remain neatly contained in the commodity components of the price index without bleeding into the broader economy. The U.S. also stands out on growth. The OECD raised its American growth forecast by 0.3 percentage points to 2.0 percent for 2026, crediting strong momentum in artificial intelligence-related business investment, lower effective tariff rates following the Supreme Court’s ruling against the IEEPA tariffs, and stronger-than-expected activity in the second half of 2025. Growth is projected to ease to 1.7 percent in 2027 as consumer spending weakens. Most of the rest of the developed world faces a much rougher year. Growth in the euro area was revised down 0.4 percentage points to just 0.8 percent growth, with higher energy prices hammering the bloc’s import-dependent economies. The United Kingdom took the largest hit among advanced economies, cut 0.5 points to 0.7 percent. Korea was slashed by 0.4 points, Canada by 0.1. Among emerging markets, Brazil and Indonesia were each revised down 0.2 points. China’s economic growth was left unchanged at 4.4 percent this year, the lowest growth rate since 2022 and much lower than the average over the past decade. Russia and Mexico saw their growth rate revised up by one-tenth of a point, to 0.6 percent and 1.3 percent, respectively. The divergence underscores America’s relative energy advantage. While the near-closure of the Strait of Hormuz has disrupted roughly 20 percent of global oil production and nearly a fifth of global liquefied natural gas trade, the United States is a net energy producer, a position the OECD noted could encourage greater domestic production despite geopolitical uncertainty. The OECD projects the Federal Reserve will hold interest rates steady through the remainder of 2026 and all of 2027, citing rising headline inflation in the near term and core inflation that remains above the Fed’s two percent target. As well, growth at or above the Fed’s long-run estimate for the U.S. economy will discourage cuts. That puts the organization well to the hawkish side of market expectations that had priced in rate cuts before the conflict erupted. The forecast rests on several assumptions the OECD itself acknowledges are fragile. U.S. effective tariff rates are assumed to remain at 9.9 percent — down from the 14 percent assumed in December — after the administration replaced the IEEPA tariffs with a flat 10 percentage point levy that must receive Congressional approval by late July to continue. And the sharp drop in headline inflation projected for 2027 — to just 1.6 percent — depends entirely on energy prices following the futures curve back down from mid-2026. The OECD warned that a longer-than-expected disruption to Middle East energy exports could produce significantly worse outcomes. In a downside scenario with oil averaging $135 per barrel in the second quarter, global output falls by roughly half a percent and consumer prices rise an additional 0.9 percentage points. The organization also flagged the risk that AI-related repricing in financial markets or rising losses in private capital markets could trigger broader financial instability.Senate approves funding for TSA and most of Homeland Security, but not immigration enforcementAgent on Jill Biden's Detail Accidentally Shoots Self in the LegIRGC Threatens to Bomb All Ships Sailing ‘To and From’ Any ‘Enemy’ LocationIRGC Threatens to Bomb All Ships Sailing ‘To and From’ Any ‘Enemy’ LocationsSouth African Activists Demand Mass Deportations Exclusive – Sen. Cotton: U.S. Shouldn’t Greenlight Chinese Drugs While Drowning American Companies in Red Tape FCC Chief Brendan Carr Celebrates One Year of ‘Delete, Delete, Delete’ with 38 Pages of FCC Regulations ScrappedNolte: ‘Spider-man’ Star Andrew Garfield Believes Watching ‘Harry Potter’ Harms Trans People … Watched It Anyway
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