War in Iran will push global inflation up to 4%, OECD forecasts

Global inflation will average 1.2% higher in the short run because of the war in Iran, according to a projection from the Organization for Economic Cooperation and Development.

The projection is compared to if the war never happened and the world didn’t go through oil and gas withdrawal. The OECD also did not raise its forecast for global growth, as it was expected to do before the war.

Before the war in Iran, the global economy was on relatively strong footing, said Eswar Prasad, an economics professor at Cornell University.

“With inflation around the world coming under control, and growth going to be pretty decent,” he said.

Prasad said economies had been benefitting from AI infrastructure spending and lower overall tariff rates in the U.S., after the Supreme Court struck down a bunch of them.

“At one level, one could argue that it's good – if good can be used in this context – that you know the world economy is being hit with a negative shock at a time when it looks somewhat resilient,” he said.

That shock, of course, is the effective closure of the Strait of Hormuz.

The OECD’s figures underscore Prasad’s point. They projected slightly slower global growth than expected, but still growth — 2.9%.

“I do think that we probably will not get a recession unless oil prices rise further — a lot,” said Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics.

That could happen, if there’s massive or long-term damage to oil production facilities in the Middle East.

Inflation is another story. The OECD forecasted a boost — 4% on average — among the world’s biggest economies from higher energy prices.

Ben May, director of global macro research at Oxford Economics, said the risk is that those price increases spread elsewhere.

“If things like the shortage of fertilizers and the higher energy costs push up things like food prices, but also perhaps the price of some other energy intensive goods and services,” he said.

Most central banks are likely to worry about that risk first, said Neil Shearing, group chief economist at Capital Economics.

“Their primary concern is going to be that another energy shock and another leg up in energy prices will de-anchor inflation expectations,” he said.

As in, the expectation will be more of it, creating a self-fulfilling loop.

The key ingredient in all of this, analysts said, is time — can the Iran war end soon enough to avoid worse economic damage, here and abroad?