According to a major international policy group, the Iran war and its effects on the world oil market will keep headline U.S. inflation this year well over the Federal Reserve’s forecasts, potentially requiring policy action.
The Organization for Economic Cooperation and Development predicted that all-items inflation in the United States will be 4.2% in 2026 in its regular report on economic conditions.
Compared to the previous estimate of 2.8%, the forecast represents a significant increase. Furthermore, it is far higher than the 2.7% that Fed officials calculated when they revised their own projections last week.
The Middle East conflict and the persistent effects of U.S. tariffs, which are lower than previous levels but still raise costs globally, are the two main causes of the revision.
The OECD stated that “the scope and duration of the conflict are very uncertain, but a prolonged period of higher energy prices will add significantly to business costs and raise consumer price inflation, with adverse consequences for growth.”
But according to the agency, U.S. inflation is expected to rapidly decline in 2027, returning to 1.6%, which is actually far lower than the Fed’s 2.2% prediction and the central bank’s 2% target. Energy and food prices are not included in core inflation, which is predicted to be 2.8% this year and 2.4% in 2027.
According to the OECD’s baseline prediction, the Fed would maintain a level policy rate until 2027 “reflecting rising headline inflation in the near-term, core inflation projected to remain above target through 2027, and solid projected GDP growth.”
However, the group warned that the Fed and its international colleagues “need to remain vigilant” in the face of inflation dangers.
According to the paper, “the current supply-induced rise in global energy prices can be looked through provided inflation expectations remain well-anchored, but policy adjustment may be needed if there are signs of broader price pressures or weaker labour market conditions.”
According to the organization, the U.S. GDP will grow at a rate of 2% this year before slowing to 1.7% in 2027. In the fourth quarter of 2025, GDP fell precipitously to a 0.7% pace.
With sporadic changes, the OECD releases its outlook twice a year.
