The OECD on Thursday issued a somber warning about the economic impact of the Iran war if it drags on, saying inflation could reach a painful 4.2% in the US this year.
That would mark the highest inflation rate among G7 member countries as Iran’s blockade of the Strait of Hormuz – a vital waterway for global oil and fertilizer supplies – adds to inflationary pressures from President Trump’s tariffs, according to the Paris-based Organization for Economic Co-operation and Development.
“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 in its latest forecast.
It estimated overall G20 inflation will hit 4%, up from 3.4% last year. That’s a lower jump than the OECD predicted for the US alone, saying inflation in the States could go up by 1.6% from last year’s rate of about 2.6%.
A prolonged disruption in the strait could force US households to spend more on fuel and cut back elsewhere, which would weigh on growth, the organization added.
It expects real GDP growth in the US to slow to 2% in 2026, down slightly from 2.1% last year. The group said US growth will fall further, to 1.7%, in 2027.
From a global perspective, the OECD noted that growth was proving resilient before the war in Iran despite intense tariff rates – partially thanks to a jump in capital spending as companies invested millions in artificial intelligence.
But global supply disruptions since the US and Israel began launching strikes on Iran last month have pushed gasoline prices higher — as well as costs for fertilizer, metals and key industrial components, which could ripple across the economy and delay investments.
Attacks on critical Middle East energy infrastructure are threatening to keep energy prices elevated even if the war ends soon, since it will take time to repair damages.
“The conflict in the Middle East is testing the resilience of the global economy,” the OECD said.
The group estimated earlier this year that global GDP would grow by a third of a percentage point in 2026 – but it said Thursday that the war in Iran has likely erased that path.
It now expects global growth to slow to 2.9% in 2026, down from 3.3% last year. The group said it will likely pick back up to 3% in 2027.
The Federal Reserve will likely keep interest rates on hold in 2026, while the European Central Bank will hike interest rates one time this year, according to the OECD forecast.
During the Fed’s meeting last week, when it held rates steady in the 3.5% to 3.75% range, policymakers kept their forecasts for a single rate cut this year in place – though they nodded to heightened uncertainty and warned that higher inflation could weigh on growth.
The OECD said its inflation outlook is higher than the Fed’s — which puts inflation at 2.7% — because it is expecting a longer-term impact on prices from the Iran war and tariffs, not a one-time shock.
It added that the US economy is also facing added economic pressure from lower immigration amid the Trump administration’s deportation crackdown.
Any measures from the US government to limit inflationary pressures will need to be “well-targeted” toward households and businesses, the OECD advised.
Credit: Source link
