Key Points

  • The Organization for Economic Cooperation and Development (OECD) forecast on Thursday that U.S. overall inflation will rise to 4.2% this year, more than double the Federal Reserve's target level, driven by higher energy costs due to the war with Iran.
  • U.S. economic growth will slow from 2.1% in 2025 to 2% this year, a 0.3 percentage point downward revision from the OECD's December forecast. The OECD said the forecast assumes that energy market disruptions will begin to ease by mid-2026, when oil, natural gas, and fertilizer prices will fall.
  • The OECD noted: "Soaring energy prices and uncertainty over the evolution of the Middle East conflict will push up costs and dampen demand, offsetting the benefits from strong tech-related investment and production, lower effective tariff rates, and 2025 growth momentum."

In-Depth Analysis

The OECD's expectation of higher inflation contrasts sharply with the optimistic median forecasts released by Federal Reserve officials on March 18. Fed officials expect inflation, as measured by the Personal Consumption Expenditures (PCE) price index, to fall from 2.8% in January to 2.7% by the end of 2026 and 2.2% by the end of 2027.

The OECD measures inflation using a metric similar to the Consumer Price Index (CPI), while the Fed focuses on the PCE indicator, which tracks a broader range of spending.

Fed officials also forecast a single 25-basis-point cut in the federal funds rate this year from the current range of 3.5% to 3.75%. Since the first airstrikes on Iran on February 28, interest rate futures traders have scaled back expectations for monetary easing this year.

Traders now see zero probability of policymakers cutting rates by at least 25 basis points before the end of July, down from 63.9% on February 26, two days before hostilities escalated.

The OECD, referring to the near-complete disruption of oil, liquefied natural gas, fertilizer, and other commodity shipments through the Strait of Hormuz, said: "Supply shocks pose a complex challenge for monetary policymakers." It added: "If inflation expectations remain well anchored, supply-driven increases in energy prices should be 'looked through.' However, central banks still need to remain vigilant and closely monitor shifts in the balance of risks to ensure underlying inflationary pressures are durably contained." The OECD is headquartered in Paris.

Federal Reserve officials are also more optimistic about U.S. economic growth than the OECD. In their median forecasts, they raised this year's gross domestic product (GDP) growth projection from 2.3% to 2.4%. Fed officials also forecast growth of 2.3% next year, up from 2% in the December forecast, and 2.1% in 2028, an increase of 0.2 percentage points from the previous estimate.

In contrast, the OECD said: "Strong growth momentum in the first quarter of 2026 is expected to be offset by a slowdown in consumer spending, due to reduced purchasing power, weak labor force growth, and depleted household savings."