Home / Economy / Global inflation set to be higher for longer, says OECD

The pickup in inflation rates around the world will be longer-lasting and sharper than previously anticipated, with a growing risk that households and businesses grow accustomed to faster price rises, the Organization for Economic Cooperation and Development said in its latest forecasts for the global economy.

But the Paris-based research body’s chief economist also warned that should the new Omicron variant of the coronavirus sidestep existing vaccines, the world economy could face a sharper slowdown than previously expected and a round of price declines similar to those seen in the early months of the pandemic.

Releasing the last of its four reports on the economic outlook this year, the OECD said it now expects consumer-price inflation in the US to average 4.4% in 2022, up from 3.1% when it last released forecasts in September. It said it now expects inflation in the eurozone to be 2.7%, up from 1.9%. The new forecasts were made before the discovery of the Omicron variant.

The OECD also expects inflation to be above the US Federal Reserve’s 2% target at 2.5% in 2023, although it expects eurozone inflation to be just below the European Central Bank’s target at 1.8% in the same year.

In an interview with The Wall Street Journal, OECD Chief Economist Laurence Boone said there is a growing risk that households and businesses will come to expect that higher inflation rates will persist. That is the outcome that central bankers fear most, since it opens the way for a vicious cycle of higher wage settlements and price rises intended to cover those higher costs.

With inflation rates having surprised policy makers over recent months, there is an associated risk that households and businesses will lose confidence in the reassurances being offered by some central banks that higher inflation will prove to be temporary.

“That’s a concern," Ms. Boone said. “People have been saying that higher inflation is transitory for 10 months or so. I would completely understand if some people started to become skeptical about that."

Some policy makers seem alert to that danger. In testimony to lawmakers Tuesday, Federal Reserve Chairman Jerome Powell backed away from the central bank’s initial characterization that elevated prices would be short-lived, or transitory.

“It’s probably a good time to retire that word and explain more clearly what we mean," he said.

The OECD believes that the lengthening period of high inflation is being caused by a series of imbalances in the demand for and supply of energy, semiconductors and a number of other goods, as well as workers.

But it said central banks could do little to address those problems, and instead urged governments and businesses to address the causes of those imbalances. First and foremost, the OECD called on governments around the world to collectively ensure that vaccines are available for all.

“We’ve been spending $10 trillion to counter the pandemic, but the cost of buying vaccines for everyone would be $50 billion, so half a percent," Ms. Boone said. “What we’re seeing now makes you think, why aren’t we doing this?"

It is not yet known whether the Omicron variant will weaken the effectiveness of those vaccines. Ms. Boone said a fresh period of disruption to supply chains while governments awaited a scientific judgment on that question could lead to even higher inflation, although the impact on economic growth would likely be modest.

But should the new variant bypass existing vaccines, governments might impose tighter lockdowns than have recently been in place while new drugs are developed. In that case, inflation rates might fall back as growth slows more sharply.

“There is a situation in which it could hit the economy harder, and you could see an abrupt decline in prices," Ms. Boone said.

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