A major global policy group says the Iran war and its impact on global energy markets will cause headline inflation in the United States this year to be much higher than the Federal Reserve expected, potentially requiring policy action.
In its regular economic update, the Organization for Economic Co-operation and Development projects that U.S. all-item inflation will be 4.2% in 2026.
This was a significant increase from the previous estimate of 2.8%. Moreover, this is much higher than the 2.7% that Fed officials estimated when they updated their own forecasts last week.
This revision is primarily due to two factors. One is the Middle East war, and the other is the continued impact of U.S. tariffs, which continue to push prices up around the world, albeit below previous levels.
“While the scope and duration of the conflict is highly uncertain, prolonged increases in energy prices would significantly increase costs for businesses, push up consumer price inflation and have a negative impact on growth,” the OECD said.
But the agency said U.S. inflation is likely to decline sharply in 2027, returning to 1.6%, which is actually well below the Fed’s 2.2% forecast and below the central bank’s 2% target. Core inflation, excluding energy and food prices, is estimated at 2.8% this year and 2.4% in 2027.
The OECD said in its baseline forecast that the Fed’s decision to keep interest rates unchanged through 2027 “reflects near-term increases in headline inflation, core inflation expected to remain above target through 2027, and strong GDP growth.”
But the organization warned that the Fed and other Feds around the world “need to remain vigilant” against the threat of inflation.
“Global energy price increases driven by current supplies are tolerable as long as inflation expectations remain robust, but policy adjustments may be needed if there are signs of broader price pressures or deteriorating labor market conditions,” the report said.
The agency expects U.S. gross domestic product (GDP) to accelerate at a pace of 2% this year, before slowing to 1.7% in 2027. GDP sharply slowed to 0.7% in the fourth quarter of 2025.
The OECD provides outlooks twice a year with regular updates.
