Omicron ‘threatens to stoke inflation’, says OECD

coronavirus affects inflation

The new Omicron strain of coronavirus threatens to further stoke inflation as outbreaks restrict production capacity and mobility in labour markets, the Organisation for Economic Co-operation and Development has warned.

The Paris-based organisation of wealthy nations has increased its inflation forecasts from three months ago.

Laurence Boone, the OECD’s chief economist, said: “Even in more benign scenarios, ongoing coronavirus outbreaks may continue to restrict mobility in some regions and across borders, with potential long-lasting consequences for labour markets and production capacity, as well as prices.”

Across its 38 members, the OECD now expects inflation to peak at the turn of 2021-22 at nearly 5 per cent before gradually pulling back to about 3 per cent by 2023. UK inflation is forecast to peak at 4.9 per cent in the first half of next year because of higher energy prices and continuing supply shortages, and then fall towards 2 per cent by the end of 2023.

The OECD said that the main risk to the recovery was that inflation continued to rise higher and stayed for longer than expected, forcing the major central banks to bring forward tightening of monetary policy. It said the banks should wait for supply tensions to ease and signal they would act if necessary.

Andrew Bailey, the Bank of England’s governor, told a session hosted by Britain’s Institute and Faculty of Actuaries yesterday that the economic impact of Covid-19 has faded since the start of the pandemic but still remains strong.

“Even now, services are recovering but we have still got quite a long way to go. That has put quite a strain on supply chains around the world,” he said, citing manufacturing and shipping of goods from east Asia that could be disrupted by more lockdowns.

Catherine Mann, a Bank of England rate-setter, warned a day earlier that the Omicron variant could add to inflation pressures, while Jerome Powell, US Federal Reserve chairman, said the central bank should consider winding down its large-scale bond purchases faster amid a strong economy and expectations that a surge in inflation will persist into the middle of next year.

The OECD was founded in 1961 to stimulate economic progress and world trade. The think tank encourages countries and organisations to work together to address policy challenges.

It expects global growth of 5.6 per cent this year, 4.5 per cent next year and 3.2 per cent in 2023. That was little changed from a previous forecast of 5.7 per cent for this year, with the forecast for next year unchanged. The OECD has not previously published estimates for 2023.

Consumption is expected to be the main driver of UK growth, with business investment continuing to be held back by uncertainty. The think tank forecast GDP growth of 6.9 per cent this year, before moderating to 4.7 per cent next year and 2.1 per cent in 2023, all up from its September forecasts.

Investors appeared to shrug off worries about the impact of Omicron on the economic recovery. The FTSE 100 index of Britain’s biggest listed companies closed up 109.23 points, or 1.6 per cent, at 7,168.68. The more domestically-focused FTSE 250 gained 393.01 points, or 1.8 per cent, to 22,912.73.