Global forecasting group sees U.S. inflation at 4.2% this year, much higher than Fed estimate

The Iran war and its impact on the global energy market will keep headline U.S. inflation this year well above the Federal Reserve's projections, possibly necessitating policy action, according to a key global policy group.

In its periodic update of economic conditions, the Organization for Economic Cooperation and Development forecast all-items inflation in the U.S. to be at 4.2% for 2026.

The forecast is a sharp step up from the prior projection of 2.8%. Moreover, it is much higher than the 2.7% Fed officials estimated when they updated their own forecasts last week.

The revision is due to two primary factors: the war in the Middle East, and the ongoing impact from U.S. tariffs that, while lower than prior levels, continue to impact prices around the world.

"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.

However, the agency said U.S. inflation is likely to recede sharply in 2027, back to 1.6%, which is actually well below the Fed estimate of 2.2% and less than the central bank's 2% target. Core inflation, which excludes energy as well as food prices, is estimated at 2.8% this year then 2.4% in 2027.

In its baseline forecast, the OECD said it sees the Fed keeping its policy rate flat through 2027 "reflecting rising headline inflation in the near-term, core inflation projected to remain above target through 2027, and solid projected GDP growth."

The organization, though, cautioned that the Fed and its global counterparts "need to remain vigilant" against inflation threats.

"The current supply-induced rise in global energy prices can be looked through provided inflation expectations remain well-anchored, but policy adjustment may be needed if there are signs of broader price pressures or weaker labour market conditions," the report stated.

The agency sees gross domestic product in the U.S. accelerating at a 2% pace this year before easing to 1.7% in 2027. GDP slowed sharply to a 0.7% rate in the fourth quarter of 2025.

The OECD provides its outlook twice a year, with periodic updates.