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Inflation Curbing Economic Growth - OECD

FILE - A vendor exchanges money with a customer at a shop selling garlic, onions and potatoes at a wholesale market. Taken April 28, 2011.
FILE - A vendor exchanges money with a customer at a shop selling garlic, onions and potatoes at a wholesale market. Taken April 28, 2011.

World economic growth is slowing due to decades-high inflation, the OECD said Tuesday, calling for "essential" further monetary policy tightening and "more targeted" government support.

Global GDP is set to grow 3.1 percent this year -- nearly half the rate for last year, the Organisation for Economic Co-operation and Development said.

Amid the effects of Russia's war in Ukraine, "growth has lost momentum, high inflation is proving persistent, confidence has weakened, and uncertainty is high", it said in its latest forecasts.

The slide is due to continue next year, with global growth falling to 2.2 percent before rebounding "to a relatively modest 2.7 percent in 2024", the Paris-based organization said.

OECD chief economist Alvaro Santos Pereira said the global economy was "reeling from the largest energy crisis since the 1970s".

The energy shock has pushed inflation up "to levels not seen for many decades" and is hitting economic growth around the world, he added.

Gas and oil deliveries from major producer Russia have been severely disrupted following its invasion of Ukraine. Western allies sanctioned its energy exports and Russia slashed supplies in the stand-off over the conflict.

High gas prices or supply disruptions would bring "significantly weaker growth and higher inflation" in the world in the next two years, the OECD report said, emphasizing that securing and diversifying supplies was "imperative".

The upheaval has sent energy costs spiraling and fueled decades-high inflation in major economies, leading central banks to hike interest rates in a bid to tame runaway prices.

But the tighter monetary policies have stoked fears of hampered economic growth as borrowing becomes more expensive for businesses and individuals.

The OECD warned that the northern hemisphere faced a "challenging" winter even though Europe has made efforts to replenish its natural gas reserves and curb demand.

Fighting inflation is a "top policy priority", the OECD said, as soaring prices erode people's purchasing power worldwide.

It recommended tightening monetary policy in countries where price rises remained high and targeted support for families and firms to avoid exacerbating inflationary pressures, with energy costs "likely to remain high and volatile for some time".

"In these difficult and uncertain times, policy has once again a crucial role to play: further tightening of monetary policy is essential to fight inflation, and fiscal policy support should become more targeted and temporary," the OECD said.

Inflation had already been on the rise before the Ukraine conflict due to bottlenecks in the global supply chain after countries emerged from Covid lockdowns.

But the OECD said that inflation was set to reach eight percent in the fourth quarter of this year in the Group of 20 top economies, falling to 5.5 percent in 2023 and 2024.

However, in a positive sign, several factors driving inflation have eased in the past year.

Supply chains that were disrupted during the pandemic have been restored, and maritime freight costs which had spiked have fallen back.