OECD warns of inflation forecast and prolonged growth risk

Global Inflation Update

The OECD warned on Tuesday that high inflation would continue for the next two years, requiring policymakers to manage efficiently so that inflation is temporarily offset and the path to economic recovery is paved.

In its most recent economic outlook, the Paris-based Club of Nations predicted that inflation would be significantly higher in 2021 and 2022 than previously predicted by the G20 countries, but this should not become a permanent problem.

Lawrence Boone, the OECD’s chief economist, said that while the OECD predicted broadly optimistic growth for a developed economy, the OECD predicted that activity levels would reach pre-epidemic levels.

“The pace of recovery has increased inflationary pressures, rapidly raising prices where we expected them before the epidemic,” the OECD said in its view. “Developers in developed economies should monitor these developments without delay.”

Boone added that, for the time being, managing inflation will be “a very difficult balancing act”.

The OECD predicts that the average inflation rate in the G20-leading economy will reach 4.5 percent in the fourth quarter of the year, 1.5 percent of the figure due to higher shipping costs and commodity price effects.

Since its last forecast in June, the OECD has revised its inflation forecast for 2021 and 2022 by more than 0.3 percentage points for most countries. In 2021, the US inflation forecast rose to 6.6 percent from 2.9 percent in June. For the UK, the same figure was 1.3 per cent in June and 2.3 per cent for inflation this month.

For June 2022, the inflation forecast has also risen sharply since June. Forecasts in France and Germany rose to 1.4 and 2.6 percent from 0.8 and 1.6 percent, respectively.

The OECD said the most urgent task was to communicate to the public that rising inflation has many temporary characteristics and that in most cases it was a combination of prices that was always expected after a temporary decline during an epidemic.

Boon said supply disruptions will be easier as coronavirus vaccination rates increase, especially in emerging economies. With widespread epidemic-related government support in the past, demand was unlikely to get out of control.

Although the main concern before the virus was that inflation was very low, now the message was that prices would stabilize at a higher rate than before the epidemic – “and that’s a good thing” – but they would not be as high as possible in the months ahead.

Consumer Inflation Bar Chart (Annual Rate,%) OECD Inflation Forecast for 2022 has also risen sharply since June

Boone said that the constant communication on the temporary nature of many of the inflation will help keep businesses and families from raising prices and demanding higher wages, which will prolong high inflation and make it more harmful.

He added that the government also had a role to play in ending the epidemic, they could only finance anything with orrow.

Welcoming efforts to spend more on climate change and digital transformation in the United States and Europe, he said: “It’s important to communicate how governments are going to do this. Right? It’s not free money forever.”

U.S. President Joe Biden is seeking to finance spending on infrastructure, including higher taxes, but will face potentially difficult times in Congress in the coming weeks.

The OECD says that as countries go through higher inflation next month, the good news is that recovery has been “extraordinarily fast”, with the potential for long-term losses for developed economies.

He said it would be okay for countries that were performing well before the epidemic, such as the United States, but not good enough for those countries to return to the pre-epidemic path, which still means high unemployment and weak growth.

Boon said many economies were the same as before, but with more debt.

The OECD said the outlook for emerging economies was significantly worse, as they are still battling high rates of coronavirus infection and low levels of vaccines, making them more vulnerable to weak recovery and high inflation.

But with more credibility in their institutions like their central bank and initial steps to curb inflation, the OECD thought they would still emerge from the coronavirus crisis better than the 2008-09 financial crisis.

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