Inflation isn't cooling as quickly as hoped. In a report published Wednesday, the OECD said price growth in 2027 is set to come in above its June projections. It lifted consumer-price forecasts for all G-20 members except China and Saudi Arabia, and warned that lingering price pressures need to be pinned down.
Pointing to renewed energy shocks and stronger-than-expected demand, the organization said central banks need to keep underlying inflation in check "at a time when inflation is already above target in many economies." The analysis also noted that the economic ripple effects of the Middle East war "unleashed by US President Donald Trump" are now expected to stretch into the back half of his term.
OECD Chief Economist Stefano Scarpetta summed it up plainly on Bloomberg Television: central banks must stay "very vigilant," and may have to step in again, "perhaps more than what they did in 2022."
The report lands after a flurry of rate increases this month, with the US Federal Reserve, the European Central Bank and the Bank of Japan each lifting rates in a span of just over a week. The OECD sees more moves ahead, though not on the scale seen after Russia's 2022 invasion of Ukraine. The OECD anticipates the Fed will raise rates once more this year, sees "further modest increases" across the euro area as well as in Australia and South Korea, and foresees "additional policy rate increases" in Japan. For now, it expects the Bank of England and Bank of Canada to hold steady.
Investors are not entirely on the same page. Money-market pricing roughly splits on the odds that the Fed, ECB and BOE each enact one or two further hikes before year end. Traders lean toward the BOJ hiking just once more in that window, and they also see the BOC lifting rates by a quarter point during that period.
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Global growth is roughly tracking the OECD's June view, but there are notable trims. Canada's outlook was cut as it confronts an escalating trade conflict with the US, while France's forecast was lowered amid a looming stretch of political uncertainty. The group cautioned that "global economic prospects remain heavily dependent on whether a durable resolution to the Middle East conflict is achieved," and said shifting trade policies - from tariffs to export restrictions - are adding uncertainty and disrupting supply.
The OECD reiterated its call for governments to repair public finances, noting that recent jumps in bond yields "underline more than ever" the need to keep spending in check. It also flagged AI as a two-sided risk: the technology could lift growth and productivity, but returns might disappoint or take longer to show up, and rising security concerns could slow development or adoption. Elevated borrowing and intricate funding structures pose an additional concern, with the OECD warning that weaker earnings could cool investment in the sector, spill into linked areas like engineering and construction, and weigh on market valuations.
For your money, the takeaway is simple: a higher inflation path paired with potential additional rate increases can shape the returns you see on bonds and other rate-sensitive holdings. Keeping an eye on central bank decisions and the risk flags the OECD is watching can help you understand where the pressure is building.
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