The OECD has sharply raised its US inflation forecast for 2026 and warned that war-driven energy shocks will push price pressures higher, even as the Federal Reserve signals that risks are now tilted toward inflation rather than unemployment.
In an interim economic outlook released on 25 March (local time), the Organisation for Economic Co-operation and Development projected US consumer prices will rise 4.2% this year, up 1.2 percentage points from its forecast three months ago and well above last year’s 2.6% increase.
“The impact of rising energy prices on inflation will more than offset the effect of lower effective tariff rates on imports,” the OECD said, noting that the inflationary impact of tariff hikes in the first half of last year had so far been only “partially reflected” in consumer prices.
The new projections assume that turmoil in global energy markets will gradually ease, with oil, gas and fertiliser prices starting to decline from the middle of this year. Even under that relatively benign technical assumption, the OECD expects inflation to remain elevated.
Growth seen steady at 2.0%
Despite the higher inflation outlook, the OECD left its forecast for US economic growth broadly unchanged, projecting a 2.0% expansion this year, only slightly below last year’s 2.1%.
It said strong investment in artificial intelligence would continue to support activity, but would be “gradually offset by slower growth in real income and consumer spending”. The robust momentum seen in the first quarter is expected to fade as households face reduced purchasing power, slower labour-force growth and dwindling savings buffers.
Fed officials lean hawkish on inflation
The OECD’s upgrade comes as senior Federal Reserve officials increasingly frame the balance of risks around inflation rather than jobs, complicating expectations for interest-rate cuts.
Fed Governor Lisa Cook said the central bank’s dual mandate of maximum employment and price stability was now skewed toward the inflation side.
“Overall, I see the balance of risks as balanced, but as a result of the war, I think the risks are currently more towards inflation,” Cook said at an event at Yale School of Management, adding that “the labor market is balanced, but that balance is precarious.”
Stephen Moore, a Fed governor appointed under former president Donald Trump, also acknowledged that inflation risks have risen, but argued that surging energy prices would erode household purchasing power and demand, making “the risk of unemployment” a growing concern.
Christopher Waller, a policymaker typically viewed as dovish, warned on 20 March that a sustained spike in oil prices would inevitably feed through to broader inflation.
“If oil prices remain at very high levels for several months, there will inevitably be ripple effects at some point,” he said, noting that “oil is a key intermediate good, so it affects prices across the board.”
Fed projections move higher
The Fed’s own economic projections released on 18 March already reflected a firmer inflation path. Policymakers’ median forecast for both headline personal consumption expenditures (PCE) inflation and core PCE, which strips out food and energy, was 2.7% for this year, up 0.3 and 0.2 percentage points respectively from December.
Core PCE is the Fed’s preferred gauge of underlying price pressures and plays a central role in its rate decisions. The higher path suggests officials see less room for aggressive easing even as growth holds up.
Dollar strength, energy position cushion US
While the war-related energy shock has rattled global markets, most economists expect the US to be less severely affected than other advanced economies, according to the Financial Times.
As a net exporter of oil and gas, the US is partly shielded from the terms-of-trade hit facing major importers in Europe and Asia. That relative resilience has helped drive a rebound in the dollar since the outbreak of war with Iran, reversing a year-long period of weakness.
The stronger greenback reflects both expectations that US growth and interest rates will remain comparatively robust and safe-haven flows into dollar assets amid geopolitical uncertainty.
Political pressure from gasoline prices
Even so, American consumers are not immune. While US natural gas prices have not spiked to the extremes seen in Europe and Asia, gasoline prices have climbed sharply, squeezing household budgets and weighing on discretionary spending.
The rise at the pump is also adding to political pressure ahead of the November midterm elections, with higher fuel costs cited as one factor dragging on former president Trump’s approval ratings.
Analysts say that electoral calculus may be one reason Trump has publicly floated the prospect of negotiations with Iran, as any de-escalation could ease energy prices and, in turn, consumer anger.
Recession odds edge higher
Despite resilient growth to date, the combination of higher-for-longer inflation, elevated interest rates and energy-price volatility has led some on Wall Street to turn more cautious.
Goldman Sachs recently raised its estimate of the probability of a US recession within the next 12 months to 30%, reflecting concerns that persistent price pressures and tighter financial conditions could eventually tip the economy into contraction.
For now, however, both the OECD and the Fed expect the US to navigate a narrow path of moderate growth and above-target inflation, with policymakers facing mounting pressure to balance the risks of doing too little on prices against the danger of tightening policy for too long.
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