There are three things that policymakers can do to combat rising inflation driven by oil price surges, according to the Organization for Economic Cooperation and Development
The OECD on Thursday raised its inflation forecast for the US and the world, predicting that US inflation would be 4.6% this year, sharply higher than the Federal Reserve’s estimate of 2.7%.
“The evolving conflict in the Middle East has human and economic costs for the countries directly involved, and will test the resilience of the global economy,” OECD said in its report.
The group noted that disruptions in shipments through the Strait of Hormuz and damage to energy infrastructure have led to supply disruptions in oil and other critical commodities like fertilizers.
Oil prices have surged since the onset of the US and Israel’s war against Iran. Brent has consistently hovered above $100 a barrel, briefly approaching $120 early in the conflict before edging back down. In the same period, other commodities, like helium and urea fertilizer, have also seen dramatic price spikes.
Here are three things the OECD says policymaker can do to help address the inflation risks.
1. Vigilant risk balancing from central banks
Monetary policy will need to be carefully calibrated as war in Iran rages on, OECD said.
“Central banks need to remain vigilant and attentive to shifts in the balance of risks around economic and financial developments to ensure that underlying inflation pressures are durably contained,” the report read.
They explained that central banks may be hesitant to act given an increase in risk aversion during the ongoing conflict, but that they need to be careful to balance risks of inflation and growth moderation with respect to labor market dynamics.
2. Protect fiscal sustainability
Governments may consider policy measures such as subsidies, tax reductions, and price caps to support households and businesses during energy price spikes.
“Any measures should be temporary and well-targeted to those most in need, while preserving incentives to reduce energy use,” OECD said.
They highlighted that policy options are costly and government budgets are already under pressure from high debt and spending.
3. Bolster energy security and efficiency
OECD explained that governments reducing reliance on imported fossil fuels will minimize the impacts of a major energy supply disruption like the global economy is seeing now.
The organization urged governments to prioritize domestic energy efficiency, explaining that these efforts can lower exposure to future geopolitical shocks and lower costs for consumers.
They flagged that clean energy initiatives, like upgrading power grids and accelerating permitting processes, support these efforts.
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