MNI: OECD Downplays Inflation Risk as Covid Rebound Builds

Global monetary and fiscal stimulus should remain in place through a transitory burst of inflation to lock in broader job and output gains during the pandemic recovery, the OECD said Monday as it nudged up global GDP forecasts on U.S. deficit spending.

Global inflation will quicken to 2.7% this year from 1.5% in 2020, fading to 2.4% in 2022, the OECD said in an updated Economic Outlook report. The Paris-based group raised this year's GDP growth to 5.8% from a March estimate of 5.6%, and next year's expansion to 4.4% from 4%. This year's growth would be the fastest since 6.5% in 1973 according to World Bank figures.

"While the recovery will bring most of the world back to pre-pandemic GDP levels by the end of 2022, this is far from enough," OECD chief economist Laurence Boone wrote in a summary of the report.

"As long as inflation expectations remain well anchored and wage growth remains subdued, we are confident that central banks will remain vigilant but look through these temporary price rises. What is of most concern, in our view, is the risk that financial markets fail to look through temporary price increases and relative price adjustments, pushing market interest rates and volatility higher," the report said.

Slow vaccine distribution in poorer nations and the chance policy makers will remove stimulus too early remain significant risks, the OECD said. The recovery so far has been driven by central bank relief and fiscal stimulus worth more than 10% of global GDP, estimated to fade to 6% in 2022.

Inflation should wane along with supply bottlenecks linked to re-openings while some economic slack persists, the OECD said. The Federal Reserve shouldn't overreact to core PCE inflation of 2.5% this year and 2.6% next year, the report said.

"Monetary policy is set to remain highly accommodative, although long-term bond yields will rise as the Federal Reserve begins to taper asset purchases once the employment recovery is firmly entrenched."