Global inflation is projected to run hotter than previously anticipated through 2027, a trajectory that will likely force central banks from Washington to Canberra to maintain tighter monetary policies, according to the Organization for Economic Cooperation and Development.
In its latest outlook released Wednesday, the Paris-based institution upgraded its consumer-price-growth forecasts for every major economy except China and Saudi Arabia, compared with its June estimates. Policymakers at the organization indicated that monetary authorities worldwide may need to respond accordingly.
"With renewed energy price shocks and stronger-than-expected demand pressures, and while inflation is already running above target in many economies, central banks need to ensure that underlying price pressures are durably contained," the OECD stated in its assessment.
This analysis highlights how the economic fallout from the Middle East conflict initiated by US President Donald Trump is poised to persist well into the latter half of his administration.
The OECD's outlook follows a recent wave of policy tightening, with the US Federal Reserve, the European Central Bank, and the Bank of Japan all lifting interest rates within a span of just over a week.
Officials at the organization anticipate further action ahead, though they suggest it will not mirror the aggressive moves implemented following Russia's 2022 invasion of Ukraine.
The OECD projects one additional rate increase from the Fed this year, "further modest adjustments" across the euro area, Australia, and South Korea—where recent central bank minutes revealed caution over the pace of tightening after two consecutive hikes—and "additional policy rate increases" in Japan. In contrast, the organization expects the Bank of England and the Bank of Canada to hold rates steady for the time being.
That outlook diverges somewhat from investor sentiment. Money markets are nearly evenly divided on whether the Fed, ECB, and BOE will deliver one or two more hikes by year-end. However, traders are more confident that the BOJ will move only once more during that period, and they also lean toward the BOC raising rates by a quarter point.
Global growth projections remain broadly unchanged from June, according to the OECD. Notable exceptions to its modest forecast adjustments include downgrades for Canada, which is embroiled in a trade dispute with the US, and France, where political instability is on the horizon.
"Global economic prospects remain heavily dependent on whether a durable resolution to the Middle East conflict is achieved," the OECD noted. "Continued shifts in trade policies, encompassing both tariffs and export restrictions, add to policy uncertainty and contribute to supply disruptions."
The report also addressed multiple risks weighing on the global economy. Officials reiterated long-standing calls for governments to restore fiscal health, underscoring how recent increases in bond yields "emphasize more than ever" the necessity of keeping spending in check.
The OECD also highlighted the perils of artificial intelligence, observing that while the technology could enhance growth and productivity, it also presents significant threats.
"There is a risk that AI investment returns disappoint or take longer to materialize," while "escalating security concerns related to AI could also hinder the technology's development or its adoption," the report said.
Leverage and complex financing arrangements also pose concerns, with potential returns possibly failing to meet expectations.
"Disappointing earnings growth could materially slow investment in the sector, transmitting to other related industries such as engineering and construction, and result in deteriorating valuations in financial markets," the OECD warned.
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