US inflation will soar to 4.2% if Iran war drags on, says OECD

• US GDP growth is expected to slow to 2% in 2026 and 1.7% in 2027, down from 2.1% in 2024, as higher fuel costs force households to cut spending elsewhere
• Global GDP growth is projected to decelerate to 2.9% in 2026 from 3.3% in 2024, erasing earlier optimistic forecasts made before the Iran conflict began
• The OECD's 4.2% US inflation forecast exceeds the Federal Reserve's 2.7% projection because it assumes longer-term price impacts from the war and tariffs rather than a temporary shock

Summary: OECD Warns Iran Conflict Could Drive US Inflation to 4.2%

The Organization for Economic Co-operation and Development (OECD) issued a stark warning Thursday that a prolonged Iran conflict could push US inflation to 4.2% in 2025, the highest among member countries. This 1.6 percentage point increase from last year's 2.6% rate would stem from Iran's blockade of the Strait of Hormuz—a critical oil and supply chokepoint—combined with inflationary pressures from President Trump's tariffs.

Key Economic Projections:

• Overall member-country inflation: 4% (up from 3.4% in 2024)
• US real GDP growth: 2% in 2026 (down from 2.1% in 2025), falling further to 1.7% in 2027
• Global GDP growth: 2.9% in 2026 (down from 3.3% in 2025), recovering to 3% in 2027

The OECD emphasized that prolonged oil supply disruptions would force US households to reduce spending beyond fuel costs, weighing on economic growth. Supply chain disruptions have already elevated prices for oil, fertilizer, metals, and industrial components, potentially delaying business investments—despite resilience from AI-related capital spending before the conflict began.

Market Implications:

Infrastructure damage threatens to keep energy prices elevated even after hostilities end. The Federal Reserve is expected to maintain interest rates in 2026, while the European Central Bank may implement one rate hike. The OECD's inflation forecast of 4.2% exceeds the Fed's 2.7% projection, as it accounts for longer-term impacts from the Iran war and tariffs rather than temporary shocks.

Additional economic pressure stems from reduced immigration under the Trump administration's deportation policies. The OECD advised that any government measures to combat inflation must be "well-targeted" toward households and businesses to prove effective.