The war against Iran will drive the U.S. inflation rate up to an estimated 4.2% this year, according to new projections by the Organization for Economic Cooperation and Development.
In its latest forecast, OECD said the conflict in the Middle East will "test the resilience of the global economy" as it generates a surge in energy costs that ripples throughout the global commodity chain. Inflation rates are projected to rise in most OECD nations, with the average across the G20 countries hitting 4.0%, more than a percentage point higher than projected at the end of 2025.
In the U.S., the projected headline inflation rate of 4.2% in 2026 is 1.2 percentage points higher than estimated just four months ago. On the flip side, inflation is projected to fall sharply in 2027, dropping to 1.6%, well below the Federal Reserve's 2% target. However, core inflation, which ignores volatile fuel and food prices, will remain above target, coming in at 2.8% this year and 2.4% in 2027.
"The breadth and duration of the conflict are very uncertain, but a prolonged period of higher energy prices will add markedly to business costs and raise consumer price inflation, with adverse consequences for growth," the OECD analysts wrote.
Before the war, global economic growth was "resilient," driven by investments in artificial intelligence and supported by favorable financial and fiscal conditions. Bilateral tariff rates had fallen following the Supreme Court's ruling against some of President Trump's tariffs, easing the flow of global commerce. But the surge in energy prices will offset some of the tailwinds that pushed the economy forward last year. The U.S. economy is projected to grow at a 2% rate in 2026 before easing to 1.7% next year.
There is also a "significant downside risk" that the war could last longer than expected, further boosting energy prices and overall inflation while weighing more heavily on growth. In such a scenario, financial markets would get repriced as demand weakens around the world.