In its latest published report, the Organization for Economic Cooperation and Development (OECD) warned that inflation is expected to move noticeably higher in the coming year, driven in large part by the escalating conflict in the Middle East.
As energy shipments through the Strait of Hormuz slow sharply, inflation across the G20 is expected to rise above 4.0%, roughly 1.2 percentage points higher than previously projected.
At the same time, the outlook for global economic growth has weakened, with projected U.S. GDP growth slowing from 2.0% in 2026 to 1.7% in 2027.
The Paris-based organization said the global economy had been on course for stronger-than-expected growth before the war with Iran intensified. Since then, however, those projections have been significantly weakened.
Global GDP growth is now expected to fall from 3.3% last year to 2.9%, before edging back up to 3.0% in 2027, as higher energy costs and uncertainty over the duration and scope of the conflict weigh on the outlook.
“There’s a high level of uncertainty around the duration and the magnitude of the current conflict in the Middle East,” said OECD Secretary-General Mathias Cormann. “And that means that this outlook is subject to significant downside risks that could result in lower growth and higher inflation.”
The OECD’s 2026 GDP growth projections remain unchanged from December. However, there had been preliminary indications earlier this year that the forecast could be revised upward by as much as 0.3 percentage points if economic conditions continued improving.
That upward revision now appears much less likely.
With energy prices surging, inflation across G20 economies is projected to run about 1.2 percentage points higher than previously expected, pushing the rate back toward 4.0% in 2026 before easing to around 2.7% in 2027.
A more severe scenario would be even more damaging.
If energy prices rise further and remain elevated for longer, the OECD estimates that global growth could be 0.5 percentage points lower by the second year, while inflation could be 0.9 percentage points higher.
China, by contrast, is expected to remain close to its previous growth forecasts, with GDP projected to expand by 4.4% this year and 4.3% in 2027.
Japan’s growth outlook is also expected to remain relatively stable, with GDP projected to expand by about 0.9% in both 2026 and 2027.
Europe faces a weaker outlook.
Growth across European economies is projected at roughly 0.8%, followed by a rebound to 1.2% in 2027, helped in part by stronger defense spending.
That represents a notable downgrade from the OECD’s December forecast, which had called for 1.2% growth in 2026 and 1.4% in 2027.
For the United States, the trade outlook remains uncertain.
Bilateral tariff rates have declined following the Supreme Court ruling against tariffs imposed under the International Emergency Economic Powers Act, while the Middle East conflict has added another layer of uncertainty.
Even so, the overall effective U.S. tariff rate remains well above levels seen before 2025.
Before the Supreme Court ruling, the OECD had forecast U.S. growth of 1.7% this year and 1.9% in 2027. Its updated outlook now projects growth moderating from 2.0% this year to 1.7% in 2027.
Heavy investment in artificial intelligence is expected to provide some support, but that boost may be offset by slower overall economic activity and weaker consumer spending.
The report also projects U.S. inflation to reach 4.2% in 2026, about 1.2 percentage points above the previous forecast.
With inflation expected to remain elevated, the OECD urged central banks to remain cautious when setting interest rate policy.
The Federal Reserve has taken a measured approach to rate reductions over the past year and left rates unchanged at its most recent meeting.
If inflation continues to rise, the central bank may have less room to pursue deeper rate cuts in the near term.
