In a snap report prompted by the Middle East conflict, the Organisation for Economic Co-operation and Development upped its inflation forecast for Australia in 2026 to 4.1 per cent, from 2.7 per cent in December.
The OECD backed Treasurer Jim Chalmers' pledge to cut spending in the upcoming budget, exhorting governments to rein in persistent budget deficits.
Given rising budget pressures, such as ageing populations and increasing defence expenditure, would be worsened by the economic shock, containing spending would limit the need for further tax increases.
Disruption to energy markets is expected to diminish economic growth across the globe, the OECD warned in its interim economic outlook, released late on Thursday.
It came as the benchmark Brent crude oil price edged above $US100 a barrel, more than 70 per cent higher than at the start of the year.
But the Paris-based body, led by former Australian finance minister Mathias Cormann, maintained its forecast for Australian GDP growth of 2.3 per cent in 2026.
Compared to most forecasts by market economists, the organisation's inflation warning for Australia was relatively mild.
ANZ Bank expects consumer prices to grow 4.5 per cent in Australia this year and tips GDP growth to halve from 2.6 per cent in 2025 to 1.3 per cent in 2026.
"We expect trimmed mean inflation to fall back into the RBA's target band in Q2 2027, two quarters later than our previous forecast," ANZ senior economist Adelaide Timbrell said.
The OECD warned central banks, such as the Reserve Bank, to remain vigilant to the risk consumers lose hope that inflation will return to target.Â
Given core inflation has been above the RBA's 2.5 per cent target for more than four years, there is an increased risk inflation expectations become unanchored, HSBC chief economist Paul Bloxham wrote in an opinion piece in the Australian Financial Review.
Inflation expectations would only remain anchored if people were convinced the bank would take action to bring inflation back to target, RBA governor Michele Bullock said after the bank hiked the cash rate to 4.1 per cent earlier in March.
In a speech on Thursday morning, assistant governor Christopher Kent reaffirmed the bank's commitment to getting inflation under control, even though higher interest rates could further exacerbate a downturn.
"A negative supply shock pushes up prices and leads to weaker economic activity, making us all poorer," he told the KangaNews Debt Capital Market Summit in Sydney.
"Central banks cannot change that. But they can ensure that the initial rise in prices does not lead to a rise in longer-term inflationary expectations and extended inflationary pressures."
Central banks must strike a balance between stamping out persistent inflation and not exacerbating the hit to growth, the OECD said.
Dr Chalmers has so far refrained from introducing support measures to ease the cost-of-living strain.
The OECD cautioned that governments should learn from the last inflation spike.
Any cost-of-living measures should be targeted to households and firms most in need, preserve incentives to lower energy use and have clear expiry mechanisms, in contrast to previous measures, such as energy rebates and cuts to the fuel excise.
The organisation backed measures recommended by the International Energy Agency to help reduce energy demand, including by encouraging work-from-home and public transport, driving slower and avoiding air travel.
In the medium term, countries should move away from foreign sources of fossil fuels and speed up approvals for renewable energy generation, the report said.
Crop yields and global food prices were also at risk due to a sharp rise in fertiliser prices, caused by the closure of the Strait of Hormuz, the OECD warned.
The report named Australia among a handful of countries particularly vulnerable to disruption of fertiliser supplies from the Middle East.
11°C