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U.S. headline inflation will surge this year to 4.2%, or more than twice the Federal Reserve’s target, as the Iran war pushes up energy costs, the Organization for Economic Cooperation and Development forecast on Thursday.

U.S. economic growth will slow from 2.1% in 2025 to 2% this year, 0.3 percentage point less than an estimate by the OECD in December. The forecasts assume that energy market disruption will start to ease in mid-2026, prompting declines in oil, gas and fertilizer prices, the OECD said.

“The energy price surge and the unpredictable nature of the evolving conflict in the Middle East will raise costs and lower demand, offsetting the tailwinds from strong technology-related investment and production, lower effective tariff rates and the momentum carried over from 2025,” the OECD said.

The OECD expectation for higher inflation differs from an optimistic median projection by Fed officials released on March 18.

Fed officials estimate that inflation, as measured by the personal consumption expenditures price index, will decline from 2.8% in January and end 2026 and 2027 at 2.7% and 2.2%, respectively.

The OECD measures inflation using a metric similar to the consumer price index, while the Fed focuses on the PCE, which tracks a wider range of expenditures.

Fed officials also forecast one quarter-point reduction in the federal funds rate this year from its current level between 3.5% and 3.75%.

Since the first air strikes against Iran on Feb. 28, traders in interest rate futures have scaled back their expectations for monetary easing this year.

Traders see zero odds that policymakers will trim the federal funds rate by at least a quarter point by the end of July, compared with 63.9% odds on Feb. 26, two days before the flare-up in hostilities.

“The supply shock poses a complex challenge for monetary policymakers,” the OECD said, referring to a near-complete halt to shipments of oil, liquified natural gas, fertilizer and other commodities through the Strait of Hormuz.

“A supply-driven increase in energy prices should be looked through if inflation expectations remain well anchored,” the OECD said.

“However, central banks will need to remain vigilant and attentive to shifts in the balance of risks to ensure that underlying inflation pressures remain durably contained,” according to the OECD, a Paris-based think-tank.

Fed officials are also more optimistic than the OECD about U.S. economic growth. In a median estimate, they marked up their expectation for gross domestic product growth this year to 2.4% from 2.3%.

Fed officials forecast 2.3% growth next year, an increase from 2% in December, and 2.1% growth in 2028, a 0.2 percentage point improvement.

In contrast, the OECD. said, “strong growth momentum in the first quarter of 2026 is expected to be offset by a slowdown in consumer spending, owing to the combination of declining purchasing power, weakening labour force growth and depleted household savings.”

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