Omicron variant stokes inflation fears

2 December 2021

Ongoing supply chain disruptions and new Covid-19 waves could cause higher rates of inflation for longer periods, according to the OECD.

In its latest Economic Outlook, the OECD said inflationary pressures were proving stronger and more persistent than expected a few months ago. The global recovery is continuing but its momentum has eased and is becoming increasingly imbalanced, it said.

The OECD projects a rebound in global economic growth to 5.6% this year and 4.5% in 2022, before settling back to 3.2% in 2023, close to the rates seen prior to the pandemic. 

However, a surge in demand for goods since economies reopened, and the failure of supply to keep pace, have generated bottlenecks in production chains. Labour shortages, pandemic-related closures, rising energy and commodity prices, and a scarcity of some key materials are all holding back growth and adding to cost pressures. Inflation has increased significantly in some regions, early in this recovery phase, the OECD said. High energy prices and fuel shortages are limiting manufacturing of key materials and intermediate goods.

Inflation is now expected to peak at the turn of 2021-22 before receding gradually to around 3% by 2023 in the OECD’s 38 member countries.

But the OECD said: “The main risk, however, is that inflation continues to surprise on the upside, forcing the major central banks to tighten monetary policy earlier and to a greater extent than projected. Such an outcome could stem from a number of possible factors, including prolonged supply disruptions, an upward shift in inflation expectations, labour market pressures, or if prices for a wider range of goods and services start to rise substantially.”

The failure to ensure rapid and effective vaccination everywhere is proving costly with uncertainty remaining high, the OECD said. It underlined the risk that continued supply disruptions, perhaps associated with further waves of Covid-19 infections, may result in longer and higher inflationary pressure.

The emergence of the Omicron variant and the potential of a worsening health situation and further restrictions would jeopardise the recovery, the OECD said. It highlighted the importance of a faster and better coordinated worldwide vaccine rollout.

A potential sharp slowdown in China, if activity in the property market declined abruptly amid concerns about the financial soundness of some of the largest real estate developers, could also disrupt the global recovery, according to the OECD.

OECD secretary-general Mathias Cormann said: “The strong rebound we have seen is now easing and supply bottlenecks, rising inflation, and the continuing impact of the pandemic are clouding the horizon. The risks and uncertainties are large, as is being seen with the emergence of the Omicron variant, aggravating the imbalances and threatening the recovery. Keeping the recovery strong and on track will entail addressing a number of imbalances, but above all it will mean managing the health crisis through better international coordination, improving health systems and massively stepping up vaccination programmes worldwide.”

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