Inflation to Rise Faster Than Previously Projected: OECD

Customers shop for produce at a supermarket in Chicago, Ill., on June 10, 2021. (Scott Olson/Getty Images)

Consumer prices in the United States and most other leading economies will rise faster than previously anticipated and will settle above pre-pandemic levels, the OECD said in its newest economic outlook, while urging central banks to set out clear strategies for managing inflationary pressures.

The headline rate of consumer price inflation is projected at 3.7 percent in 2021 on average in the Group of 20 leading economies, before rising to 3.9 percent in 2022, the Paris-based organization said in its September economic outlook (pdf). This is 0.2 of a percentage point higher for 2021 and 0.5 of a percentage point higher for 2022 than the previous May estimate.

In the United States, inflation is now expected to come in at 3.6 percent in 2021, higher by 0.7 of a percentage point over May’s estimate. In 2022, U.S. consumer price inflation is projected at 3.1 percent in 2022, an upward revision of 0.5 of a percentage point compared to prior estimates.

“Nevertheless, the outlook for inflation varies markedly. It has risen sharply in the U.S. and some emerging market economies but remains relatively low in many other advanced economies, particularly in Europe,” the OECD said in a release.

The international organization said higher commodity prices and global shipping costs were adding around 1.5 percentage points to annual consumer price inflation in the G-20 countries and that these factors are to blame for the bulk of the uptick in prices over the past year.

The OECD expects the impact of commodity prices and rising shipping costs on inflation to ease gradually, with capacity expanding and costs stabilizing.

“Supply pressures should fade gradually, wage growth remains moderate and inflation expectations are still anchored, but near-term risks are on the upside,” the OECD said, adding that it expects underlying domestic cost pressures to remain moderate.

“Nonetheless, inflation is expected to settle at a level above the average rates seen prior to the pandemic,” the OECD said. “This is welcome after many years of below-target inflation outcomes, but it also points to potential risks.”

Laurence Boone, OECD chief economist, said at a press conference presenting the September economic outlook that policymakers managing inflation face “a very difficult balancing act.”

Meanwhile, the Vice President of the European Central Bank, Luis de Guindos, told a Financial Times online event on Tuesday that “there are risks of much more persistent pressures on inflation in the future” especially if the recent price hikes feed into higher wage demands.

While the OECD recommended that accommodative monetary policies should remain in place for now, it noted that “clear guidance is needed about the horizon and extent to which any inflation overshooting will be tolerated, and the planned timing and sequencing of eventual moves towards monetary policy normalization.”

“Fiscal policies should remain flexible and contingent on the state of the economy,” the OECD recommended, while warning of a “premature and abrupt withdrawal of policy support” while the near-term outlook remains uncertain.

The OECD’s newest report comes as Federal Reserve officials convene for a two-day policy meeting where they will consider a raft of economic data and discuss the timing of dialing back the extraordinary support measures for the economy. Around the time the pandemic hit, the Fed dropped interest rates to near zero and set out on a massive asset-buying program, purchasing around $120 billion in monthly Treasury and mortgage securities, which has boosted the recovery and buoyed markets, but also contributed to inflationary pressures.