OECD Warns Middle East Conflict Escalates Global Stagflation Risk, Central Banks May Face Dilemma of Fighting Inflation and Supporting Growth

On May 19, OECD Secretary-General Mathias Cormann stated that the escalating Middle East conflict is delivering a "double whammy" to the global economy: dragging down growth on one hand and stoking inflation on the other. Global central banks may now face a tricky balancing act between curbing inflation and supporting growth. Cormann pointed out that the OECD already flagged these risks in its March interim economic assessment and plans to release an updated global economic outlook on June 3. He explained that as oil prices rise and energy shocks spill over, if this triggers wage increases and other "second-round inflation effects," even amid slowing economic growth, central banks around the world may still have to keep monetary policy tight. Reports note that the recent G7 Finance Ministers and Central Bank Governors meeting in Paris was originally focused on long-term structural issues such as the U.S. fiscal deficit. However, with Middle East tensions heating up and global bond markets experiencing sell-offs, energy prices and inflation risks quickly took center stage at the gathering.